So you think the trustee rules are easy? Think again – a ... · Darren Wynen, Director – Insyt...

So you think the trustee rules are easy? Think again – a session on S.17A Darren Wynen Director Insyt Pty Ltd

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CONTENTS

1. Introduction 2. Overview – understanding the trustee rules 3. Observations on S.17A(1) and (2) 4. Understanding the rules around trustee remuneration 5. Who can be trustee of an SMSF 6. Exceptions under S.17A for alternative trustee appointments 7. Administration – consents and record keeping 8. Failing to satisfy the definition of an SMSF 9. Case Study – divorce, SMSFs, and failing to satisfy the definition of an SMSF

© Insyt Pty Ltd

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So you think the trustee rules are

easy? Think again!

Disclaimer This presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation.

Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

© Darren Wynen, Insyt Pty Ltd 1


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About the Presenter

Darren Wynen, Director – Insyt Pty Ltd About the Author – Insyt Pty Ltd Darren Wynen is the founder of Insyt, a company established to provide practical information and consulting services to advisers in the SMSF area. These services comprise of providing newsletter and information services for advisers, together with a consulting and enquiry service.

On the teaching side, Darren is passionate trainer who has been in the tax and accounting field for over 20 years and more specifically, in the training arena for the last 16 years. At some stage, he has presented for most of the professional associations. Darren has gained a broad range of experience in both writing and presenting taxation and superannuation materials to advisers, and has now established himself as a respected trainer and writer.

Whilst working for a large professional association, Darren also dealt with many practitioner enquiries as a consultant and technical adviser, making him extremely proficient at handling tax research and developing an eye for technical detail.

Darren is currently a senior contract trainer for TaxBanter Pty Ltd, and he writes and presents their fully accredited superannuation webinars and face to face sessions for advisers. He also presents face to face in-house and public offer tax training sessions for TaxBanter in Melbourne, his home town, allowing him to stay at the cutting edge of tax and superannuation developments.

In addition, Darren is also involved with teaching and assisting with writing part of a large superannuation course with the University of NSW. He has also recently been contracted by Thomson Reuters to update the SMSF component of their superannuation and financial planning handbooks.

Contact: Darren Wynen [email protected] (03) 9515 4633 0450 435 286


mailto:[email protected]


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So you think the trustee rules are easy? Think again a session on S.17A

1. Introduction It is no secret that SMSFs have boomed in a massive way in recent years. However, it is also fair to say that in devising strategies for our clients, looking at the latest estate planning issues or investment rules, we don’t really pay a lot of attention to the glue that binds an SMSF together – section 17A.

That is, when we say ‘SMSF’, we almost automatically assume that the fund qualifies as an SMSF, without appreciating the significance of S.17A – it is the main provision keeping a superannuation fund within the ambit of being an ‘SMSF’ and, therefore, availing the fund of the ability to self-govern and obtain the tax concessions.

Furthermore, the introduction of the new administrative penalty regime for SMSFs has led to a new era of accountability for trustees. Specifically, in relation to breaches of the trustee rules, substantial penalties can be incurred under the new regime for seemingly minor breaches of the law. Worst of all, the breaches can lead to potential non-compliance arising. Such is the importance of satisfying the definition of an SMSF.

Although the ATO has not yet (to my knowledge) imposed the full force of the new penalties on trustees, it is likely that the expiry of an implementation, or ‘honey-moon’ period (however long that is) will result in harsher penalties arising than what we have seen in the past.

With that in mind, there are a number of points addressed in this paper, as outlined below:

1. Introduction

2. Overview – understanding the trustee rules

3. Observations on Section 17A(1) and (2)

4. Understanding the rules around trustee remuneration – S.17B

5. Who can be trustee of an SMSF?

6. Exceptions under S.17A for alternative trustee appointments

7. Administration – consents and record keeping

8. Failing to satisfy the definition of an SMSF

9. Case study – divorce, SMSFs and failing to satisfy the definition of an SMSF

All section references are to the SIS Act 1993, and all Regulation references are to the SIS Regulations 1994, unless otherwise stated.



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2. Overview – understanding the trustee rules A key requirements for a superannuation fund to qualify as an SMSF is for the fund to meet all conditions in S.17A of the SIS Act. The requirements differ depending on the number of members of the fund, and whether the fund has a corporate trustee or individual trustees. The conditions to qualify as an SMSF are summarised in the tables below, which are split as follows:

(a) the SMSF has between 2 and 5 members; and

(b) a single member SMSF.

Corporate trustee or individual trustee?

It is the author’s opinion that the discussion about whether individual or a corporate trustee should be adopted from an SMSF is a well-traversed path. Furthermore, in recent times, the advent of the trustee penalty regime has reinforced the view that a corporate trustee generally outweighs an individual trustee as being the ‘right’ choice (i.e., due to individual trustees being separately liable for the penalty, whereas a corporate trustee only receives a single penalty).

It is not my intention for this paper to compare the advantages and disadvantages of individual or a corporate trustee. However, a point will be added to the debate. In circumstances where the money has been ‘lost’ or ‘spent’ or ‘taken out to save the business’ and the members are unable to repay the SMSF, anecdotally, this is more likely to lead to the ATO making the fund non-complying.

In this regard, the author has observed that an SMSF with individual trustees is easier pickings for the ATO to recover the income tax assessed from the fund being made non-complying, as they are jointly and severally liable to the outstanding tax debt. This means that if the debt cannot be recovered from one member (e.g., the trustee is bankrupt), the ATO practice is to recover the debt from the other trustees.

In contrast, it seems that there are only limited legislative powers where the ATO can recover the liability jointly and severally from the directors. For example, refer to S.169 (dealing with the new administrative penalty regime) and S.284-95 of Schedule 1 to the Tax Admin Act 1953 (dealing with false or misleading statements).

Therefore, to my knowledge, the ATO cannot so easily seek to recover the income tax debt from the directors of a corporate trustee (but must recover it from the company instead). Therefore, it is the author’s opinion that the individual’s personal assets are generally better protected with a corporate trustee.



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Corporate trustees and the Part 8 associate rules

Continuing with the discussion around corporate versus individual trustees, but stepping slightly to the left, a further interesting point to note is that Section 70B defines an associate of an individual to include: “…whether or not the primary entity [being the member, for example] is in the capacity of trustee”.

If the fund (or a trust for that matter) has individual trustees, this means that the analysis of who is considered to be an associate of the individual is examined with the member wearing two ‘hats’:

• the individual in their own right; and • the individual as trustee (e.g., of the SMSF).

Therefore, if the member is an individual trustee of a trust, then S.70B must be analysed to determine the associates of the member acting in their capacity as trustee. Under S.70B, this is not required if the trust has a corporate trustee.

In contrast, if a company was trustee, it means that the analysis of S.70B only occurs from the perspective of the individual in their own right, because the individual is not acting in the capacity as trustee (the company is). Therefore, the list of Part 8 associates for individual trustees may be significantly broader, as compared to if a company acts as corporate trustee1.

EXAMPLE – Part 8 associate rules

Jason is a member and trustee of an SMSF. Jason also acts as trustee of his family discretionary trust. The trust jointly owns a rental property with Sam, a friend of Jims. Jason in his capacity as trustee, wants to lend money on commercial terms to Sam’s daughter, Lucy.

Is Lucy a Part 8 associate of Jason?

Yes, Sam will be a Part 8 associate of Jason and, therefore, the loan from Jason’s SMSF to Lucy will be treated as an in-house asset. More specifically, Jason (in his capacity as trustee of his family trust) is a partner in a tax law partnership with Sam. As Sam is an individual, a child of Sam’s is included as a Part 8 associate – refer to S.70B(d).

1 The Commissioner states at paragraph 141 of SMSFR 2009/4 that: “As a member must be an individual, section 70B is the relevant provision for determining whether the entity in question is a Part 8 associate of that member. However, a standard employer-sponsor may be any type of entity and therefore whether the entity in question is a Part 8 associate of a standard employer-sponsor will be ascertained using the provision which relates to the form that the standard employer-sponsor takes.”



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A. SMSF has between 2 and 5 members

Under S.17A(1), all of the following requirements must be satisfied for the fund to qualify as an SMSF:

Description Requirement

Membership The fund has fewer than five members;

Individual trustees Each individual trustee is a member of the fund and each fund member is also a trustee of the fund;

Corporate trustee Each director of the corporate trustee is also a member of the fund and each member is a director of the corporate trustee;

Employee condition No member of the fund is an ‘employee’ of another member of the fund, unless the members are ‘relatives’; and

Remuneration restriction • no trustee of the fund receives any remuneration for any duties or services performed in relation to the fund; and

• if the trustee of the fund is a company, no director receives any remuneration for any duties or services performed by the director in relation to the fund. Refer to S.17A(1).

A ‘member’ of an SMSF is broadly defined, and can include a minor. Provided the deed allows, it is also possible for a member to have a nil account balance.

Generally, any individual who is at least 18 years of age can be a trustee of an SMSF (or director of the corporate trustee). However, an individual cannot be a trustee (or director of a corporate trustee) if they are a under a legal disability (e.g., mental incapacity), or they are a disqualified person.

Note, there are limited exceptions under the trustee rules allowing another person to act as trustee of the SMSF in the place of the member. For example, if a member of the fund dies, a fund will not fail to be an SMSF if the legal personal representative of the deceased member is a trustee of the fund for the period:

(i) commencing when the member died; and

(ii) ending when death benefits begin to be payable in respect of the member. Refer to S.17A(3), SMSFR 2010/2 and ATO Interpretative Decision ID 2010/139.

The intent of this requirement is to ensure that there is a common interest and equal influence between the members of an SMSF.

This restriction does not prevent the trustee, or a director of the corporate trustee, from being remunerated for other services they provide to the fund in a separate capacity (e.g., a professional capacity).



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B. Single member SMSF

Under S.17A(2), all of the following requirements must be satisfied for the fund to qualify as an SMSF:

Description Requirement

Individual trustees • the member is one of only two trustees, and the other trustee is a relative of the member; or

• the member is one of only two trustees, and the member is not an ‘employee’ of the other trustee;

Corporate trustee • the member is the sole director of the corporate trustee; • the member is one of only two directors of the corporate

trustee, with the other director being a ‘relative’ of the member; or

• the member is one of only two directors of the corporate trustee, and the member is not an ‘employee’ of the other director; and

Remuneration restriction • no trustee of the fund receives any remuneration for performing duties or services as trustee of the fund; or

• if the trustee of the fund is a body corporate, no director receives any remuneration for performing duties or services as a director in relation to the fund. Refer to S.17A(2).

A ‘member’ of an SMSF is broadly defined, and can include a minor. Refer to S.10(3). Provided the deed allows, it is also possible for a member to have a nil account balance.

Generally, any individual who is at least 18 years of age can be a trustee of an SMSF (or director of the corporate trustee). However, an individual cannot be a trustee (or director of a corporate trustee) if they are a under a legal disability (e.g., mental incapacity), or they are a disqualified person. Refer also to S.126K.

Note, there are limited exceptions under the trustee rules allowing another person to act as trustee of the SMSF in the place of the member. For example, if a member of the fund dies, a fund will not fail to be an SMSF if the legal personal representative of the deceased member is a trustee of the fund for the period:


(ii) ending when death benefits begin to be payable in respect of the member. Refer to S.17A(3), SMSFR 2010/2 and ATO Interpretative Decision ID 2010/139.

This restriction does not prevent the trustee, or a director of the corporate trustee, from being remunerated for other services they provide to the fund in a separate capacity (e.g., a professional capacity).



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3. Observations on Section 17A(1) and (2) Outlined below are a number of observations regarding the operation of S.17A(1) and (2):

(a) Shareholding in the corporate trustee

Sections 17A(1) and (2) clearly outline the requirements to be satisfied in terms of who is permitted to be a director the corporate trustee for both single and multiple member funds. However, no restrictions are imposed by these provisions on who can be the shareholder of these entities, nor on the voting rights attaching to the shares. This means that control of the shares (and voting rights), by way of amendment to the company constitution can be used for succession and estate planning purposes.

However, some practitioners take the view that such amendments to the constitution would contravene S.52A(2)(e), which reads as follows:

“…not to enter into any contract, or do anything else, that would:

(i) prevent the director from, or hinder the director in, properly performing or exercising the director's functions and powers as director of the corporate trustee; or

(ii) prevent the corporate trustee from, or hinder the corporate trustee in, properly performing or exercising the corporate trustee's functions and powers as trustee of the entity…”

In other words, by imposing such changes, do they prevent the director from properly exercising their power as director of the corporate trustee.

This question was raised with the ATO at item 8 of the June 2011 meeting of the NTLG Superannuation Technical Sub-group, whereby the ATO was requested to consider whether or not such clauses are consistent with the SIS Act.

The ATO did not directly comment on the issue, but noted the following in the minutes:

“Members generally agreed that the use of such terms would not in themselves normally cause a contravention of the SIS Act but that it was a matter for trust law between the members of the fund. It was also noted by a member that these types of voting arrangements are commonly used and that therefore, if the ATO were to state that it did not accept these, it would cause considerable problems in respect of existing deeds. It was also noted that differential voting rights can be used in respect of directors of a corporate trustee.”

Although the ATO has not expressly stated that such clauses would breach S.52A, directors of the corporate trustee should be aware of this risk, should they incorporate such amendments into the constitution.

(b) No tiebreaker mechanism

Section 17A does not contain any dispute resolution clause if the parties cannot agree on a particular issue. Refer also to Ioppolo & Hesford (as executors of the estate of the late Francesca Conti) v Conti & Anor [2013] WASC 389

(c) Trustee remuneration



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A member cannot be remunerated for any duties or services they provide in the capacity as trustee in relation to the SMSF. Refer to S.17A(1)(f) and (2)(c). Restrictions on trustee remuneration for non-trustee duties now falls under the jurisdiction of S.17B.

(d) Meaning of ‘employee’ for the purposes of S.17A

A person cannot be a member of the same SMSF as another person who is their employer, unless the members concerned are ‘relatives’. The intent of this requirement is to ensure that there is a common interest and equal influence between the members of an SMSF.

The author’s observations are that this provision does not tend to cause problems in practice. Anecdotally, it is more commonplace for employees and/or business owners to establish their own SMSF, but then seek to undertake joint investments (such as acquiring units in a unit trust). In these circumstances, the issue tends to be focused around the in-house asset rules (and the meaning of Part 8 associate) instead of whether or not S.17A is satisfied.

(e) Corporate trustee trading in its own right

No restriction exists in the SIS Act 1993 preventing the corporate trustee from trading in its own right. However, this does not mean that having a trading entity act as a corporate trustee is sensible.

A number of problems may stem from the trading company entering liquidation or receivership, including exposure of the superannuation fund’s assets and restrictions being placed on the director’s powers. Furthermore, the requirement to appoint all members as directors of the trustee company may unintentionally result in the superannuation fund members having a say in the direction of the business.

Likewise, with the requirement for all directors to be members for multiple member funds, non-member directors will need to resign from the company. Finally, where the company is not a sole purpose company, a higher ASIC fee also applies.

Hence, for a number of reasons, it is not recommended (strongly) that a trading company also be used as a corporate trustee for an SMSF.

(f) Different meaning of relative

The definition of relative for the purposes of S.17A(1) and (2) is defined in S.17A(9) and (9A), not in S.10(1). In contrast, the investment rules contained in the SIS Act 1993 draw on the definition of ‘relative’ contained in S.10(1), as modified by S.10(5).

Examples of the provisions to which the definition of relative in S.10(1) would apply are S.65 (prohibition on lending to a member or relative) and S.70B(a) in terms of who is a Part 8 associate of an individual.



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A number of key differences are highlighted below in bold:

Item Description

Section 17A(9) "relative", in relation to an individual, means:

(a) a parent, child, grandparent, grandchild, sibling, aunt, uncle, great-aunt, great-uncle, niece, nephew, first cousin or second cousin of the individual or of his or her spouse or former spouse; or (b) a spouse or former spouse of the individual, or of an individual referred to in paragraph (a). (9A) For the purposes of paragraph (a) of the definition of relative in subsection (9), if one individual is the child of another individual because of the definition of child in subsection 10(1), relationships traced to, from or through the individual are to be determined in the same way as if the individual were the natural child of the other individual. (emphasis added)

Section 10(1) "relative" of an individual means the following:

(a) a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant2 or adopted child of the individual or of his or her spouse; (b) a spouse of the individual or of any other individual referred to in paragraph (a).

Note: Subsection (5) may be relevant to determining relationships for the purposes of paragraph (a) of the definition of relative.

…

(5) For the purposes of paragraph (a) of the definition of relative in subsection (1), if one individual is the child of another individual because of the definition of child in subsection (1), relationships traced to, from or through the individual are to be determined in the same way as if the individual were the natural child of the other individual. (emphasis added)

WARNING – Definition of ‘relative’

It is important to note that the definition of ‘relative’ outlined in S.17A(9) and (9A) is only relevant for the purposes of ascertaining whether or not a superannuation fund satisfies the definition of ‘SMSF’, as outlined in S.17A.

2 A lineal descendant includes children, grand-children and great grand-children.



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EXAMPLE – Definition of ‘relative’

John is the sole member and director of the corporate trustee of his SMSF. The fund lends money to Samantha, who is John’s ex-spouse. A commercial loan agreement is put in place between the fund and Samantha.

Does the provision of the loan by John’s fund to Samantha contravene S.65 and S.71?

No, provision of the loan to Samantha does not contravene S.65 nor S.71 because Samantha is not a ‘relative’ of John, as defined in S.10(1).

More specifically, ‘former spouse’ (Samantha is a former spouse of John) is included within the definition of relative in S.17A(9), but is not included within the definition of ‘relative’ as defined in S.10(1). However, S.17A(9) is not relevant to determining whether or not Samantha is a ‘relative’ of John. This is made clear by the words defining relative in S.17A(9) “…in this section”.

Expanded meaning of relative – S.17A(9A)

The meaning of ‘relative’ is expanded under S.17A(9A), which provides a tracing ruling in respect of certain family relationships. The provision, which was introduced as part of the reforms recognising same-sex relationships, reads as follows:

“(9A) For the purposes of paragraph (a) of the definition of relative in subsection (9), if one individual is the child of another individual because of the definition of child in subsection 10(1), relationships traced to, from or through the individual are to be determined in the same way as if the individual were the natural child of the other individual.”

The definition of child in S.10(1) is set out below:

“"child" , in relation to a person, includes:

(a) an adopted child, a stepchild or an ex-nuptial child of the person; and

(b) a child of the person's spouse; and

(c) someone who is a child of the person within the meaning of the Family Law Act 1975.”

Essentially, this provision states that if one individual (A) is a child of another individual (B) because of the definition of child in S.10(1), relationships traced to, from or through A (i.e., the child) are determined as if A were the natural child of B. In practical terms, this is saying that an adopted, step-child etc. is treated as a natural child when analysing the definition of relative. Also refer to ATO ID 2011/77.

This can significantly broaden who is included as a ‘relative’, as demonstrated below.

It should also be noted that S.17A(9A) is also replicated under S.10(5). This is relevant to analysing whether a person is a relative for those provisions other than S.17A.



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EXAMPLE – Extended definition of ‘child’

Diana and John were married, and had a child, Simone. After divorcing John, Diana marries Hugh.

Is Hugh a ‘relative’ of Simone?

Yes, Hugh is considered to be a relative, as defined under S.17A(9), as per the analysis below:

• Hugh must qualify as a ‘parent’ of Simone to be a relative; • Simone is considered to be a ‘child’ or Hugh under the definition of ‘child’ in S.10(1),

either as a step-child or a child of Hugh’s spouse, Diana; • Therefore, Simone is considered to be a natural child of Hugh; and • Tracing from Simone, Hugh is a ‘parent’ of Simone and, therefore considered to be a

relative of Simone.

Comment

In the author’s experience, this extended definition of ‘relative’ is more likely to be an issue in relation to the investment rules, including S.65 (provision of financial assistance to a member or relative), and the in-house asset rules. For example, the SMSF may be seeking to invest in a unit trust controlled by X, who is a step-parent of an SMSF member.



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4. Understanding the rules around trustee remuneration – S.17B As noted above, a member cannot be remunerated for any duties or services they provide in the capacity as trustee in relation to the SMSF. Refer to S.17A(1)(f) and (2)(c). Similarly, if the trustee of the fund is a company, no director can receive any remuneration for duties or services performed by them as directors in relation to the fund that are either:

(a) performed in the person’s capacity as director of the corporate trustee; or

(b) in connection with the company’s capacity as trustee. Refer to S.17A(1)(g) and (2)(d).

This restriction does not prevent the trustee, or a director of the corporate trustee, from being remunerated for other services they provide to the fund in a separate capacity (e.g., a professional capacity). However, additional restrictions have been introduced to ensure that trustee remuneration is not used as a way for trustees to gain early access to their retirement benefits.

More specifically, S.17B provides that a trustee or director can only be remunerated for non-trustee duties and services where the following requirements are satisfied:

• appropriate qualifications and licences – the trustee or director must be both qualified and hold all necessary licences to carry out the duties or services for the fund;

• performed though a business – the duties or services must be provided by the trustee or director in the ordinary course of a business carried on by the trustee or director of providing similar duties or services to the public; and

• arm’s length terms – the remuneration must be on an arm’s length basis.

For individual trustees, the additional remuneration restrictions in S.17B apply from 8 October 1999. For directors of corporate trustees, the change applies from the 2008 income year.

EXAMPLE – Risk of contribution arising

Henry and Lisa are both individual trustees and members of an SMSF. Henry does much of the trustee work relating to the fund: including preparation of the minutes of meeting for the trustees, attending to queries from the accountant and auditor. Henry would like to charge a small fee to the SMSF to reflect the time he spends on attending to these matters.

Is Henry permitted to charge a fee for the trustee work he performs?

No, Henry cannot charge a fee for this work he performs. This is because S.17A(1)(f) prohibits a person from receiving remuneration for duties or services they perform in their capacity as trustee.



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EXAMPLE – Non-trustee services performed

Adrian is a member and individual trustee of his SMSF. The fund owns a rental property in Victoria, and Adrian generally attends to any repairs and maintenance needed to the property. Adrian is a sole trader, and operates a business as a handyman, but he does not hold any licences or other qualifications.

During the year, Adrian repaired the gas inlet to the ducted heating, and would like to charge the fund $800 to reflect the time he spent undertaking the necessary repairs.

Can Adrian charge the fund for the plumbing works he performed?

No, he cannot charge a fee to his SMSF. In Victoria, a licensed plumber must provide a compliance certificate for all plumbing work with a value of $750 or more and most gas fitting work. As Adrian is not a licenced plumber, he cannot charge the fund for the works he has performed. Note, he may also be in breach of Victorian laws by performing work that should have been undertaken by a licenced plumber.

(a) Trustee remuneration and related entities

It is interesting to note that the remuneration restrictions in S.17A and S.17B only regulate work performed directly by the individual trustee (or director). That is, these provisions do not impose restrictions on the performance of duties and services performed by persons or entities other than the trustee (or director of the trustee).

This means, that the remuneration restrictions set out in S.17A and S.17B do not apply to services performed for the fund by a relative or other related entity of the trustee. However, such services would need to be provided by the trustee or the director on an arm’s length basis. Refer to S.109. Furthermore, care should be taken to ensure that no other requirements under the SIS Act or Regulations are breached.

WARNING – Contribution regarding significant work

One may take the view that trustee remuneration may not be ‘tax effective’, due to the SMSF being limited to claiming a tax deduction for the expenditure of 15% at best, whilst any income received by the related entity will be potentially taxed at a higher rate. Therefore, the temptation is to ‘do the work for free’.

In this regard, the ATO accepts that an accountant preparing a tax return for an SMSF for no consideration will not be a contribution3. However, the Commissioner considered in circumstances where a builder renovating a property owned by the fund did not charge for their labour, a contribution arose because the work increased the property value4.

3 Refer to example 2, paragraphs 75 and 76 of Taxation Ruling TR 2010/1. 4 Refer to item 7.3 of the minutes of meeting of the NTLG Superannuation Technical Sub-group, held in March 2013.



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5. Who can be a trustee of an SMSF? Generally, any individual who is at least 18 years of age can be a trustee of an SMSF. However, an individual cannot be a trustee if they are a under a legal disability (e.g., mental incapacity), or they are a disqualified person.

More specifically, an individual cannot act as trustee of an SMSF or a director of a corporate trustee of an SMSF if the individual is a disqualified person, and they know that they are a disqualified person. Refer to S.126K. Where a person is disqualified by an order of the Federal Court under S.126H (e.g., due to serious breaches of the SIS Act) the person cannot act as a trustee or be a director of the corporate trustee of that fund.

Understanding the concept of a ‘disqualified person’

For the purposes of S.126K, a person is a ‘disqualified person’ if at any time the individual:

• has been convicted of an offence against or arising out of a law of the Commonwealth, a State, a Territory or a foreign country, being an offence involving dishonest conduct;

• has been subject to a civil penalty order under the SIS Act;

• is an insolvent under administration. Note, an ‘insolvent under administration’ is defined in S.10(1) and includes an undischarged bankrupt; or

• has been disqualified by the Regulator or an order of the Federal Court under S.126H. Refer to S.120(1).

Furthermore, a company is not permitted to act as trustee for the purposes of S.126K if:

• the company knows, or has reasonable grounds to suspect, that a person who is, or is acting as, a responsible officer of the company is a disqualified person (or is disqualified under S.126H from being a responsible officer of the company). A ‘responsible officer’ is defined in S.10(1) as a director, secretary or executive officer of the company;

• a receiver, administrator, receiver and manager or a provisional liquidator has been appointed in respect of the company, or

• the company has begun to be wound up. Refer to S.120(2).

Some of the issues regarding disqualification of trustees are set out below.

WARNING – Requirement to advise the ATO

If a trustee (i.e., an individual trustee or a company trustee) becomes a disqualified person, they must immediately inform the Commissioner in writing and resign as a trustee. Refer to S.126K(7). Substantial penalties can apply for disqualified persons who act as trustee, including imprisonment for two years. Note, if the Regulator suspends or removes all of the trustees of a superannuation fund, the Regulator must appoint a constitutional corporation or an individual to act as the trustee during the period of suspension or until the vacancy is filled.



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(a) Understanding the concept of convicted of an offence involving dishonest conduct

As noted above, one of the circumstances in which a person is a ‘disqualified person’ is if they have been convicted of an offence involving dishonest conduct. However, neither the SIS Act 1993 nor the SIS Regulations 1994 elaborate on the meaning of this concept. Furthermore, to my knowledge, there is no publicly available ATO material that discusses the meaning of this term.

Therefore, we turn to the ordinary meaning of various terms. In this regard, the Macquarie dictionary defines ‘convicted’ as:

“…to prove or declare guilty of an offence, especially after a legal trial.”

Under the Crimes Act, S.85ZM defines when a person is taken to be ‘convicted’ of an offence as follows:

(1) For the purposes of this Part, a person shall be taken to have been convicted of an offence if:

(a) the person has been convicted, whether summarily or on indictment, of the offence;

(b) the person has been charged with, and found guilty of, the offence but discharged without conviction; or

(c) the person has not been found guilty of the offence, but a court has taken it into account in passing sentence on the person for another offence.

In the context of a recent enquiry5 into sentencing (Tasmania), the report framed the meaning of conviction to be:

“…conviction is generally to be understood in the sense of the recording (or not recording) of a conviction as part of the imposition of sentence under the Sentencing Act 1997 (Tas), following a finding of guilt.”

Section 120(3) provides the meaning of convicted of an offence involving dishonesty includes a reference to an order under S.19B of the Crimes Act 1914. Basically, this section allows for a court to discharge an offender without proceeding to conviction. However, a dismissal or discharge under S.19B will still count as being ‘convicted’ for the purposes of the SIS Act. Furthermore, S.120(4) provides that the law on spent convictions does not apply. The existence of those convictions is aimed at giving offenders a second chance6.

It is submitted that the mere incurring of an infringement notice is not ‘convicted’ within the meaning of S.120(1)(a)(i). However, if the fine were unpaid, and the matter progressed to Court, this may result in the recording of a conviction and, therefore, becoming a disqualified person.

Finally, it should be noted that a person can be disqualified for an offence committed overseas.

5 Non-Conviction Sentences – Final Report No.3, Sentencing Advisory Council, page 5 (August 2014) 6 The Commonwealth spent convictions scheme (the Scheme) allows an individual not to disclose certain criminal convictions in particular circumstances, and prohibits unauthorised use or disclosure of information about the conviction – refer to the Office of the Australian Information Commissioner, available from: http://www.oaic.gov.au/privacy/privacy-resources/privacy-fact-sheets/law-enforcement/privacy-fact-sheet-41-commonwealth-spent-convictions-scheme



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TIP – Confirming whether an individual is disqualified

In SPG 520, APRA states at paragraph 48 that to be satisfied an individual is not disqualified in terms of S.120(1)(a)(i), an Australian Federal Police (AFP) check should be conducted. APRA also goes in to state that a check from another Police Force or CrimTrac accredited agency which would provide an identical check to that provided by the AFP would also be sufficient. Reference should also be made to Porter, Application under the Superannuation Industry (Supervision) Act 1993 [2012] FCA 1431 (‘Porter’).

The ATO has advised that it gathers information from federal government agencies, such as the Australian Federal Police, the Australian Crime Commission, Customs and the Integrity Commissioner7. Therefore, advisers should be aware that it is likely the ATO are already undertaking data matching to determine whether or not trustees are disqualified persons.

What is ‘dishonest conduct’?

‘Dishonest conduct’ is not defined in the SIS Act 1993. However, the Crimes Act 1900 defines ‘dishonest’ to mean:

"dishonest" means dishonest according to the standards of ordinary people and known by the defendant to be dishonest according to the standards of ordinary people.”

Some general examples of ‘dishonest conduct’ are as follows (note, these are not SIS Act specific):

• Shoplifting (refer to ATO ID 2011/24 and the explanatory memorandum to Superannuation Industry (Supervision) Legislation Amendment Bill 1995);

• Financial adviser making false statements in relation to financial products (refer to ASIC media release 10-261AD);

• ‘Tombstoning’ behavior whereby insurance brokers submit insurance applications in the names of dead of fictitious people (ASIC media release 14-139MR);

• Publishing a false statement for financial advantage (Mourched and Commissioner of Taxation [2014] AATA 223); and

• Making false entries in business records to steal money (Porter).

Note, a person can also be a disqualified person if a civil penalty order was made against the person – refer to S.120(1)(a)(ii).

7 Refer to paragraph 2.11 of Review into the Australian Taxation Office’s compliance approach to individual taxpayers – use of data matching, Inspector General of Taxation, available from http://www.igt.gov.au/content/reports/ATO_data_matching/ATO_Data_Matching_with_Cover.pdf



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(b) Insolvent under administration

A disqualified person also includes a person who is ‘insolvent under administration’. A person is also not permitted to act as a trustee (or director of a corporate trustee) if they are insolvent under administration. Section 10(1) defines ‘insolvent under administration as follows:

“(a) under the Bankruptcy Act 1966 or the law of an external Territory, is a bankrupt in respect of a bankruptcy from which the person has not been discharged; or

(b) under the law of a country other than Australia or the law of an external Territory, has the status of an undischarged bankrupt;

and includes:

(c) a person any of whose property is subject to control under:

(i) section 50 or 188 of the Bankruptcy Act 1966 ; or

(ii) a corresponding provision of the law of an external Territory or the law of a foreign country; or

(d) a person who has executed a personal insolvency agreement under:

(i) Part X of the Bankruptcy Act 1966 ; or

(ii) the corresponding provisions of the law of an external Territory or the law of a foreign country;

if a certificate has not been given under section 232 of that Act or the corresponding provision of the law of the external Territory or foreign country, as the case may be, in respect of the agreement.”

WARNING – Part X arrangements

The definition of ‘insolvent administration’ not only catches bankrupt individuals, but also those individuals who have entered into personal insolvency agreements under Part X of the Bankruptcy Act 1966. A personal insolvency agreement is “…a legally binding arrangement between a debtor and his or her creditors whereby the debtor offers to pay creditors in full or part by instalments or a lump sum8”.

(b) Disqualification by the ATO

A person may also be a ‘disqualified person’ if the Commissioner disqualifies the person under S.126A. Refer also to S.120(1)(c)(i). It is interesting to note that 585 individuals were disqualified in 2014 (94 in 2010).

In this regard, the Commissioner can disqualify a trustee under S.126A in the following two circumstances:

• Contravention of the SIS Act or Financial Sector (Collection of Data) Act 2001 – if there is a contravention of either Act by the trustee or director, and the Commissioner considers the nature or the number of contraventions to be serious. The Commissioner determines this on a case by case basis, and he provides the following considerations at paragraph 37 of PS LA 2006/17:

• “The behaviour of the trustees in relation to the contravention.

8 Australian Financial Security Authority, Australian Government, Personal insolvency agreements under Part X www.afsa.gov.au


http://www.afsa.gov.au/


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• The extent to which the fund's assets were affected by the contravention. The greater the proportion of the fund's assets affected by the contravention, the more likely it is that the contravention is serious.

• The extent to which the fund's assets were exposed to financial risk and whether there was any loss to the value of the fund.

• The number and extent of contraventions over a period of time. A single contravention on its own may not be considered serious, but a number of contraventions taken together may make the situation serious.”

• The nature of the contravention in the overall scheme of the legislation. For example, a contravention involving an artificial arrangement intended to undermine the regulatory provisions or the tax concessions offered to SMSFs is likely to be serious.”

• Fit and proper person – the Commissioner is satisfied that the individual is not considered to be a fit and proper person. In this regard, the fitness of an individual relates to all matters affecting the capacities of a person to perform their role as trustee, and includes their qualifications and competence. The propriety of a person refers to their general behavior and conduct. According to the ATO, the factors must be assessed in light of risks of allowing the individual to remain as trustee, such as the risk of the trustee:

• “misappropriating the funds

• dealing with the assets in an illegal way

• failing to keep proper records, and

• providing dishonest information to the ATO.”9

Get out of jail free card – applying to the Commissioner to waive their disqualified person status

As noted above, a person is a disqualified person if they have been convicted of an offence in respect of dishonest conduct. Refer to S.120(1)(a)(i).

If a person becomes a disqualified person (e.g., they are convicted of an offence in respect of dishonest conduct) they cannot act as trustee of an SMSF or a director of a corporate trustee of an SMSF. Refer to S.126K. Furthermore, it is not possible for the disqualified person to appoint a legal personal representative under S.17A(3) to act as trustee in their place because S.17A(10) specifically prohibits this:

“For the avoidance of doubt, subsection (3) does not permit a person, in the capacity of legal personal representative of a disqualified person (within the meaning of section 120), to be a trustee of a self managed superannuation fund or a director of a body corporate that is a trustee of a self managed superannuation fund.”

Hence, the ramifications of being a disqualified person are serious because they basically mean that the person cannot be a member of an SMSF (i.e., because a key requirement under S.17A is for all fund members to be trustee unless an exception applies).

9 PS LA 2006/17, paragraph 46.



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However, there is one important exception that allows a person to apply to the Commissioner to have their disqualified status waived (i.e., and remain a member of the fund). Under this exception, a person who was disqualified for being convicted of an offence for dishonest conduct can apply to the Commissioner for a declaration waiving their disqualified person status within 14 days of the person's conviction, provided that the offence did not involve serious dishonest conduct. Refer to S.126B(1) and S.126B(3) for the details to included in the offender’s application for waiver.

An application can be lodged outside the 14 day time frame only if the ATO is satisfied that there were exceptional circumstances preventing the application from being made within that period. In this regard, under S.126B(2) an offence involves ‘serious’ dishonest conduct if the penalty actually imposed for the dishonest conduct is either of the following:

(a) a term of imprisonment for at least 2 years, or such longer period as specified in the regulations (no such period has been prescribed). Refer to S.126B(2)(a). The ATO considered the meaning of the phrase ‘… penalty actually imposed for the offence is a term of imprisonment for at least two years’ in ATO ID 2011/24. In that ID, the judge sentenced the offender to a term of more than two years, but they were released earlier than two years under a ‘recognisance release order’ (i.e., an early release order based on the offender giving security).

The Commissioner considered that two year term of imprisonment was based on the actual conviction handed down by the court for the offence, rather than the time served by the offender. As the original penalty for the offence was more than two years, the individual had committed an offence involving serious dishonest conduct, and could not apply to have their disqualified status waived; or

(b) a fine of at least 120 penalty units or such larger fine as specified in the regulations (no such fine has been prescribed). Refer to S.126B(2)(b). Once the Commissioner receives the application, he will consider whether the person is highly unlikely to contravene the SIS Act and do anything that would result in the SMSF not complying with the SIS Act. Refer to S.126D. In considering the application, he will have regard to a number of factors such as the nature of the offence, the applicant’s age when they committed the offence and the time that has passed since the offence was committed.

WARNING – 14-day time limit to submit application In a decision before the Administrative Appeals Tribunal, the Member refused to waive an individual's disqualified status. Refer to Mourched and Commissioner of Taxation [2014] AATA 223. Under S.126B(3), the individual had 14 days from the date of his conviction on 23 March 2010 (which was 6 April 2010) to request a waiver of his disqualified status. However, the individual did not submit an application for waiver of disqualified person status until 1 May 2012 (dated 30 April 2012). In finding that the ATO correctly denied the application on the basis that no exceptional circumstances existed, the Tribunal found that the illness of the member and his wife were not exceptional circumstances. Refer also to VBS v Commissioner of Taxation 2005 [AATA] 1303.



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6. Exceptions under S.17A allowing for alternative trustee appointments

The SMSF segment is unique because the members of the fund are generally also the trustees of the fund. This means that the members, as trustees, basically control both the investments made, and benefits paid out by the fund. This flexibility and control over the fund’s investments is one the main drivers behind the increasing popularity of SMSFs.

To ensure the members stay in control of the fund, specific rules set out who can be a trustee for the fund in order for it to qualify as an SMSF under S.17A. One primary requirement in S.17A(1) and (2) is that each member of an SMSF must be a trustee, or director of the corporate trustee of an SMSF. Furthermore, each trustee, or director, must also be a fund member (note, special rules apply to single member funds).

However, circumstances may arise whereby the member cannot be trustee of the fund (e.g., they die, or they are a minor). Section 17A(3) prescribes a number of limited exceptions that allow a person other than the member to act as trustee of the SMSF without causing the fund to fail the basic conditions set out in S.17A(1) and (2). These exceptions are discussed below.

ADVISER WARNING – Change of trustee

It is important for advisers to ensure that any change of trustee (including to the directors of a corporate trustee) is properly documented. In this regard, the change of trustee must comply with the trust deed for the fund and the SIS Act. In particular, S.118 of the SIS Act specifies that the person must consent in writing to act as a trustee or as a director of the corporate trustee.

(a) Legal personal representative of a deceased member

A fund will not fail to be an SMSF under S.17A if a fund member has died, and the member’s legal personal representative (‘LPR’) is a trustee of the fund (or a director of the corporate trustee) in the member’s place for the period:


(ii) ending when death benefits begin to be payable in respect of the member.

Therefore, the LPR can stand in place of the deceased member as an individual trustee (or director of the corporate trustee) following the member’s death, without causing the fund to cease being an SMSF. Furthermore, once the deceased member's benefits commence to be paid from the SMSF, the fund then has 6 months to restructure before the fund ceases to be an SMSF. Refer to S.17A(4). However, this 6 month period of grace does not apply if the reason (or one of the reasons) that the fund would cease to be an SMSF is the admission of one or more new members to the fund.

Note, where the member has died, a ‘legal personal representative’ refers to the executor of the will or administrator of the estate of deceased member.



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TIP – Requirement for the fund to restructure

If an LPR is trustee (or director of the corporate trustee) in place of the deceased member, the LPR must resign from their trustee position in the deceased member's place within 6 months of the deceased member's death benefits commencing to be paid to the beneficiaries. Note, if a new member is admitted, the member must generally be appointed as trustee (or director of the corporate trustee) from the time the person joins the fund. This is because this 6 month period of grace does not apply in respect of the admission of new members – refer to S.17A(5).

In this regard, the fund may need to restructure to ensure that it complies with S.17A, as follows:

(a) all or part of the member’s death benefits are payable as a pension – in these circumstances, the beneficiary must be a member of the fund (i.e., if they are not already). Furthermore, unless the person receiving the death benefit pension is already a fund member, they will also generally need to become an individual trustee (or director of the corporate trustee). As noted above, the 6 month period of grace to restructure will not apply in respect of a new member being admitted to the fund – refer to S.17A(5);

(b) a two-member fund becomes a single member fund following the member’s death – in this case, if the remaining member is an individual trustee, another individual trustee will need to be appointed (i.e., in accordance with the rules in S. 17A(2)). Alternatively, a corporate trustee could be appointed instead of individual trustees. Note, the LPR could resign as trustee (or director of the corporate trustee) for the deceased member and be reappointed as trustee or director in a separate capacity, provided the requirements of S.17A(2) are met; or

(c) a three member fund becomes a two member fund – in this case, the LPR will need to resign as a trustee (or director of the corporate trustee) within 6 months of the deceased member's death benefits commencing to be paid from the fund.

EXAMPLE – Death of a member

Josephine, Emmanuel and Vicki are members of their SMSF, and are individual trustees. During the income year, Josephine passes away, and her LPR is appointed to stand in her place as a trustee of the fund. Josephine’s death benefits are cashed out to Emmanuel, one of the remaining fund members.

The fund must ensure that it satisfies the definition of a ‘self-managed superannuation fund’ in S.17A within 6 months of the Josephine's benefits being paid out – refer to S.17A(4). This means that Josephine's LPR must resign within this period of time.



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Lessons from Ioppolo & Hesford (as executors of the estate of the late Francesca Conti) v Conti & Anor [2013] WASC 389

In a decision before the Supreme Court of Western Australia, the Court dealt with a number of important issues regarding the operation of S.17A. These are outlined below.

Facts of the case

The facts of the case can be summarised as follows:

• On 29 July 2002, Francesca Conti and the defendant established an SMSF, of which Francesca and her husband were the only trustees and members of the fund.

• In her Will, the stated intention of the deceased was for her superannuation entitlements to be paid to her children; she did not want any entitlement to be paid to her husband (the defendant).

• Prior to her death, Francesca made two lapsing binding death benefit nominations in favour of her husband (in 2002 and 2006). However, at the time of Francesca’s death, no binding nomination was in force.

• The rules of the superannuation fund, in the absence of a binding written direction from a deceased member, provided that the trustees may pay the benefit to a spouse of child of any member, or any other person who was dependent on the member at the date of death (there was no written direction given by the deceased).

• From the date of Francesca's death until 4 February 2011, the defendant was the sole trustee of the fund. Augusto Investments Pty Ltd was appointed as trustee of the fund from this time.

• The dispute arose because the trustee, using his discretion as sole trustee, determined that Francesca's superannuation benefits should be distributed to himself (and not the children, as was preferred under the Will).

Issues considered by the Court

The key issues addressed by the Court were as follows:

1. Was the trustee (i.e., the defendant) obliged to appoint one of the executors for the deceased estate as a trustee of the SMSF?

2. Did the trustee exercise its discretion in a bona fide manner?

3. Could one of the plaintiffs be appointed as trustee under S.77 of the Trustees Act 1962?

Decision of the Court

In handing down its decision in favour of the defendant, the Court noted that the fund had made two binding death benefit nominations, but confirmed that they had both lapsed. Furthermore, the Court also found that the trustee was entitled to ignore the direction in the will.



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The plaintiffs argued that the defendants were required to appoint one of the executors of the estate as trustee of the fund in order to remain an SMSF. However, the Court found that there is no requirement for the executor of the fund to be appointed under S.17A(3) and S.17A(1)(d)(i). Instead, S.17A(4) allows a period of grace of up to 6 months to organise its affairs to remain an SMSF. In these circumstances, the fund remained an SMSF due to the appointment of a corporate trustee.

The Court also rejected the submissions that by not acting in accordance with the Will, the trustee had not exercised its discretion in a bona-fide manner as required under the trust deed. However, in finding that the trustee exercised its discretion in a bona fide manner, the Court noted the trustee had sought advice from solicitors as to its rights and obligations and, therefore, the Court was not obliged to appoint an additional trustee.

The Court found no lack of bona fides or any other improper action and, therefore, no compelling reason existed to appoint an additional trustee. The Court noted that appointing the executor would ‘sow the seeds of disaster’ because it would result in a deadlocked corporate trustee.

(b) Legal personal representative

As noted above, there are a number of exceptions to the strict trustee requirements under S.17A. A fund will not fail to be an SMSF under S.17A if the member’s LPR is a trustee of the fund (or a director of the corporate trustee) in the member’s place during any period when:

• the member of the fund is under a legal disability. Refer to S.17A(3)(b)(i), which is discussed below; or

• the legal personal representative has an enduring power of attorney (‘EPOA’) in respect of the member of the fund. Refer to S. 17A(3)(b)(ii). It is important to note that the exception outlined above cannot apply to a ‘general power of attorney’. Furthermore, the Commissioner has issued SMSFR 2010/2 dealing with the operation of the exception under S.17A(3)(b)(ii).

As stated above, S.17A(10) prevents a person in the capacity of LPR of a disqualified person (e.g., an undischarged bankrupt) acting as a trustee (or director of a corporate trustee) of an SMSF. This basically means that a disqualified person cannot remain as a member of an SMSF.

ADVISER WARNING – Enduring power of attorney

The powers granted under an EPOA are significant, as the attorney may be granted complete authority over the donor’s affairs. Hence, the attorney as a trustee of the fund has considerable power in respect of the member’s superannuation monies, and could act improperly. Refer to Katz v Grossman [2005] NSWSC 934 and Ioppolo & Hesford v Conti [2013] WASC 389.



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Furthermore, if the member grants an EPOA, the member must resign as trustee (or director of the corporate trustee) to satisfy the requirements under S.17A(3)(b)(ii). The EPOA is then appointed as trustee (or director of the corporate trustee). Hence, the attorney essentially accepts the full duties, obligations and responsibilities of being a trustee. The donor and the attorney need to ensure that they understand the legal implications of an EPOA. For these reasons, it is recommended that legal advice be sought.

Enduring power of attorney – Commissioner’s views in SMSFR 2010/2

As noted above, S.17A establishes certain conditions that must be satisfied in order for a fund to be an SMSF. Under the basic conditions, one of the primary requirements is for each SMSF member to be a trustee, or director of the corporate trustee, so each member has equal influence over management of the fund. Furthermore, each trustee, or director of the corporate trustee, must also be a member of the fund (except in the case of a single member fund – special rules apply). Refer to S.17A(1) and (2).

Circumstances may arise whereby the member needs to step aside from the trusteeship role and allow their LPR to manage their superannuation affairs (e.g., by reason of ill-health). The typical situations in which a member of a fund may seek to appoint an enduring power of attorney, are:

1. for the attorney to take responsibility for managing the affairs of the SMSF (e.g., due to the member being financially irresponsible);

2. the member is ill or has become incapacitated; or

3. the member is travelling overseas for an extended period.

In this regard, S.17A(3)(b)(ii) provides a limited exception to allow an LPR who holds an enduring power of attorney (‘EPOA’) in respect of the member to be a trustee (or director of the corporate trustee) for the member, without causing the fund to fail the SMSF definition.

The ATO has published SMSFR 2010/2, which explains how the exception in S.17A(3)(b)(ii) operates. Given the fund may fail to be an SMSF if the requirements of S.17A(3)(b)(ii) are not met, it is important for advisers to understand the nuances of the Commissioner’s views on EPOAs and SMSFs. This segment of the notes will cover a range of important issues to be considered by advisers and their clients before executing an EPOA.

By way of background, there are two main types of POA, as described below:

(a) general power of attorney (‘GPOA’) – a ‘general’ power of attorney (‘POA’) is granted by a donor to an attorney to authorise the attorney to make decisions on their behalf. A GPOA is usually only granted for a set period of time, or for a specific purpose (e.g., to manage their financial affairs whilst the donor is absent). Furthermore, the attorney’s power is revoked if the donor loses mental capacity, dies or revokes the POA.



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(b) enduring power of attorney (‘EPOA’) – whilst the concept of EPOA is not specifically defined in the SIS Act, the Commissioner considers an EPOA is “…a power authorised by statute which survives the legal incapacity of the donor”. Refer to paragraph 42 of SMSFR 2010/2. In contrast to a GPOA, an EPOA continues to apply even if the donor loses the capacity to make their own decisions (e.g., due to accident, illness or injury).

WARNING – General power of attorney insufficient

If a person has only been granted a power of attorney that is not an ‘enduring power of attorney’ (e.g., a general power of attorney) they will not satisfy either the requirement under S.17A(3)(b)(ii) to be an LPR, or to hold an EPOA.

Therefore, the conditions of S.17A(3)(b)(ii) will not be satisfied, and the status of the fund as an SMSF will not be maintained if the attorney becomes a trustee of the fund, or a director of the corporate trustee in place of the member.

What are some of the key issues to consider in relation to an enduring power of attorney?

Section S.17A(3)(b)(ii) allows an LPR who holds an enduring power of attorney (‘EPOA’) in respect of the member to be a trustee, or director of the corporate trustee, in place of the member without causing the fund to fail the SMSF definition. There are a number of important issues in SMSFR 2010/2 for an SMSF member to consider before appointing an EPOA. In particular, the following points should be noted:

Item Description

Requirement to be an LPR

The first requirement under the exception in S.17A(3)(b)(ii) is for the EPOA to be an ‘LPR’:

“…(ii) the legal personal representative has an enduring power of attorney in respect of the member of the fund;…”

Under S.10(1), a ‘legal personal representative’ is defined to include “…a person who holds an enduring power of attorney granted by a person.” Therefore, a person who holds an EPOA is automatically considered to be an LPR for the member for the purposes of the exception in S.17A(3)(b)(ii).

General power of attorney insufficient

A general power of attorney is not an EPOA, and therefore will not satisfy the S.17A(3)(b)(ii) exception.

Scope of the EPOA An important decision for the donor is the scope of the authority to be conferred to the LPR by the EPOA. For example, a donor may decide to grant a limited EPOA whereby the authority of the LPR is limited to the member’s SMSF (i.e., the authority does not cover the member’s other financial assets, such as their personal investments or home). In this regard, no additional limitations are imposed on the scope of the EPOA (i.e., provided it complies with all other requirements under S.17A(3)(b)(ii), such as relevant State or Territory EPOA legislation).



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Item Description

Appointment as trustee

The Commissioner considers that the mere existence of an EPOA does not by itself mean that the attorney becomes a trustee of the fund, or a director of the corporate trustee. That is, the LPR must be physically appointed as a trustee or a director of the corporate trustee for the exception to apply (except if the LPR is already a trustee or director). Furthermore, the member must be removed as trustee or director of the corporate trustee, except in the case of alternate directors. Note, the general issues covered above in relation to S.17A should be considered in respect of the appointment (e.g., the LPR cannot be remunerated for any duties or services performed as a trustee). It is important to note that once an LPR is appointed as a trustee or director, they are acting in that capacity, not under the authority of the EPOA.

Remuneration of LPR once appointed as trustee or director not permitted

Remuneration of LPR once appointed as trustee or director not permitted – it is common for a member to request an adviser (e.g., accountant or solicitor) to be appointed as an EPOA for the member because family members or friends may often be unwilling to assume this role. In these circumstances, the LPR cannot be remunerated for any duties or services they perform in their position as trustee for the fund. This is because all other requirements in S.17A(1) and (2) must continue to be met once the LPR is appointed (i.e., remunerating the adviser in their capacity as trustee would breach S.17A(1) and S.17A(2)). Refer to S.17A(1)(f) and (g), and S.17A(2)(c) and (d). Note, this restriction does not prevent the LPR from being remunerated for other services they provide to the fund in a separate capacity (e.g., an accountant charging for preparation for the financial statements and taxation return for the fund), provided the requirements of S.17B are satisfied (where required).

Appointment of multiple attorneys permitted

Where an EPOA is executed in favour of multiple attorneys, one or more of those attorneys can be appointed as trustee (or director) in the member’s place. That is, the Commissioner now accepts that there is no requirement under S.17A(3)(b)(ii) for the original number of trustees or directors to be preserved. Refer to paragraphs 15 and 65 of SMSFR 2010/2.



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Item Description

One person can be trustee or director for more than one donor member

If an LPR with an EPOA is appointed as trustee or director for multiple members, the number of fund trustees or directors would reduce. The number of trustees or directors would also reduce if an existing member and trustee (or director) held an EPOA for another fund member (i.e., the donor). A reduction in the number of trustees (or directors) would occur because the member holding the EPOA does not need to be reappointed as trustee in a separate capacity as the donor member’s LPR (i.e., because the member holding the EPOA already is an existing trustee or director). In both instances, the ATO accepts that the terms of S.17A(3)(b)(ii) can still apply even though the number of trustees or directors has reduced. In other words, S.17A(3)(b)(ii) still has application in circumstances where one person is acting as trustee of director in two separate capacities. Refer to paragraphs 61 to 65 of SMSFR 2010/2 and issue 4 of SMSFR 2010/2EC.

Mentally capable donors

An EPOA is intended to survive the mental incapacity of the donor. The Commissioner considers that invoking an EPOA whilst the member is mentally capable will still satisfy the requirements of S.10(1) and S.17A(3)(b)(ii).

Alternate directors permitted

As noted above, if an SMSF has a corporate trustee, the member can resign as director and appoint in their place an LPR to whom an EPOA has been granted. Generally speaking, this will result in the exception under S.17A(3)(b)(ii) being satisfied. A full resignation of directorship may not suit all members. Instead, the member may prefer to retain their directorship and appoint a director to act more an ad hoc basis, as required (e.g., during periods they are absent with their employment). In such situations, it is possible to appoint an ‘alternate director’, who is basically only a director during those periods they are required to ‘fill in’ for the appointing director. Note, however, the appointing director will always remain in the position of director – even while the alternate director is exercising their power as director.

Invalid EPOA If the EPOA is terminated, S.17A(3)(b)(ii) will no longer be satisfied. Therefore, the following must occur within 6 months of the termination for the fund to continue to be an SMSF:

• The former LPR must resign as a trustee, or director of the trustee company; and

• The member must be re-appointed as a trustee. Refer to S.17A(4).



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EXAMPLE – Appointment of LPR under an enduring power of attorney

Jacqui is a member and individual trustee of her SMSF. Jacqui encounters a brief period of ill-health, and decides to execute an EPOA authorising Katy, a close personal friend, to make financial decisions for her. Jacqui remains a trustee of her fund.

Does Katy become a trustee of the fund upon the EPOA being executed?

No. There is no requirement for Katy to become a trustee of the fund simply because the EPOA is executed by Jacqui. In these circumstances, Jacqui has chosen to remain a trustee of her SMSF, and has not physically resigned from her position, nor appointed Katy as trustee in her place.

Does S.17A(3)(b)(ii) have operation in these circumstances?

No. Katy, as LPR for Jacqui, has not been appointed as trustee or director in place of Jacqui. Therefore, the exception under S.17A(3)(b)(ii) has no operation in this instance.

EXAMPLE – Mentally capable donor

Jane is a member of a single member SMSF, and is trustee of the fund with her daughter Chloe. Jane is finding that her other activities are keeping her extremely busy, resulting in her trustee duties becoming too difficult and time consuming.

As a result, Jane executes an EPOA for Chloe, and subsequently resigns as trustee of the fund. This leaves Chloe as the sole trustee of the fund.

Is Chloe now Jane’s LPR?

Yes, Chloe is an LPR for Jane as defined in S.10(1) because she holds an EPOA in respect of Jane.

Will this appointment satisfy the EPOA exception in S.17A(3)(b)(ii)?

Yes, provided that the EPOA remains valid during the period that Chloe is trustee, the appointment satisfies the requirements in S.17A(3)(b)(ii). Furthermore, even though Jane is of ‘sound mind’ and mentally capable, the appointment still remains valid. Therefore, Chloe’s appointment will satisfy S.17A(3)(b)(ii), even Jane is still mentally capable.

(c) Member of the fund is under a legal disability because of age

A minor is permitted to be a member of an SMSF, but cannot act as trustee of the fund. As all members of an SMSF must also be trustees, a fund with minor members would prima facie fail to satisfy the SMSF definition. To ensure a fund with a minor member can still be an SMSF, there are two exceptions under S.17A(3) allowing certain persons to act as trustee on the minor’s behalf:



easy? Think again!

(a) Legal personal representative – if the minor member has a ‘legal personal representative’ (‘LPR’) as defined in S.10(1), the child’s LPR can be appointed as trustee or director of the body corporate in place of the member whilst the member is under a legal disability. Refer to S.17A(3)(b)(i); or

(b) Parent or guardian – as minors are under a legal disability, it is not possible for them to be trustees of a superannuation fund. In circumstances where the minor does not have an LPR, the parent or guardian of the member can be a trustee (or a director of the corporate trustee) in the member’s place. Refer to S.17A(3)(c).

Note, the way the law was originally drafted, a parent or guardian could not become a director of a corporate trustee in place of a child. However, S.17A(3)(c) was amended by Tax Laws Amendment (2011 Measures No. 9) Act 2012 to ensure that where the SMSF has a corporate trustee, a parent or guardian may be director of the company in place of the minor. This amendment is retrospective in application, commencing from 8 October 1999 (the date that S.17A(3)(c) was inserted).

Furthermore, the parent or guardian can also be a member of the same fund, and therefore will act as trustee (or director of the corporate trustee) in two separate capacities. However, in determining the number of fund members (e.g., to work out whether the number of SMSF members is fewer than five), the minor will count as a member, even though the parent of guardian is the trustee (or director of the corporate trustee) for both parties.

The LPR (or parent or guardian) must cease to be a trustee from the time the minor reaches 18 years of age. In addition, the member will also need to be appointed as a trustee (or a director of the corporate trustee) of the fund when they reach 18 years of age.

Members under 18 years of age

As noted above, a minor cannot be an individual trustee of an SMSF (or a director of the corporate trustee) if they are under 18 years of age. However, a minor is still permitted to be a member of an SMSF if the minor’s parent or guardian is trustee (or a director of the corporate trustee), or the minor has a legal personal representative (providing the governing rules allow for this). Furthermore, the parent or guardian can still act in the capacity as trustee or director for the minor even if they are a member of the same SMSF.

EXAMPLE – Member under a legal disability because of age

Adriana (aged 40) and Sam (aged 13) are the only two members of an SMSF. Adriana is Sam’s parent. Sam cannot be an individual trustee nor a director of the corporate trustee of the fund, as he is under a legal disability (i.e., under age 18).

If Sam does not have an LPR, Adriana could also act as an individual trustee on behalf of Sam. Therefore, Adriana would be acting as trustee in two capacities – as a member, and also on Sam’s behalf.



easy? Think again!

If the fund had a corporate trustee, could Adriana be appointed as a director of the body corporate?

Yes. Section 17A(3)(c) now allows Adriana to act as a director on the corporate trustee on behalf of Sam where Sam does not have an LPR. This means that regardless of whether an SMSF has individual trustees or a corporate trustee, a parent or guardian can step in to act as trustee or director to ensure the fund complies with the definition of SMSF in S.17A.

(d) Acting trustee

If the Regulator suspends or removes all of the trustees of a superannuation fund, the Regulator must appoint a constitutional corporation or an individual to act as the trustee during the period of the suspension or until the vacancy is filled. Refer to S.17A(3)(d) and S.134.



easy? Think again!

7. Administration – consents and record-keeping All new trustees/directors of corporate trustees of an SMSF appointed after 30 June 2007 are now required to sign a trustee declaration stating that they understand their obligations and responsibilities. Refer to NAT 71089, available from www.ato.gov.au. This declaration is not required to be lodged with the ATO, but must be retained for 10 years. Refer to S.104A. Failure to comply with this requirement to sign can result in an administrative penalty of $1,700 being imposed under S.166, item 10.

In addition, all individual trustees/directors of the corporate trustee must consent in writing to being appointed as a trustee. Refer to S.118. This consent must be retained for 10 years. Refer to S.104(1)(c).

Finally, each trustee of an SMSF must keep up-to-date records (for a period of 10 years), details of the following:

• all changes of trustee; • all changes to directors of the corporate trustee; and • all trustee consents provided under S.118. Refer to S.104(1).

Failure to comply with this requirement can result in an administrative penalty of $1,700 being imposed under S.166, item 9.

Change of details operating standard Reg 11.07AA

It should also be noted that it is an operating standard for the trustee of an SMSF to give written notice to the Regulator of any change in the following:

(a) the name of the fund;

(b) the postal address, registered address or address for service of 8notices of the fund;

(c) details of the contact person for the fund, and contact telephone and facsimile numbers;

(d) the membership of the fund;

(e) the trustees of the fund;

(f) the directors of the fund's corporate trustee. Refer to Reg 11.07AA.

The notice can be provided to the ATO in a number of ways, including by lodging the paper form NAT 3036, and must be provided within 28 days of the change. As Reg 11.07AA is an operating standard, failure to comply with this requirement can result in an administrative penalty of $3,400 (20 penalty units) being imposed under S.166, item 1.



easy? Think again!

WARNING – Signing the accounts If there is a corporate trustee with more than director, the accounts and statements must be signed by at least 2 company directors. Similarly, if there is a group of individual trustees, the accounts and statements must be signed by at 2 of those trustees. Refer to S.35B(3). Failure to comply with this requirement can result in an administrative penalty of $1,700 arising under S.166(1), item 2.



easy? Think again!

8. Failing to satisfy the definition of an SMSF If a fund fails to satisfy a condition in S.17A (e.g. a member is an employee of another member and they are not relatives), the fund will continue to remain a self-managed superannuation fund until the earlier of:

(a) The appointment of a registrable superannuation entity (‘RSE’) licensee as the trustee of the fund. Note, this will result in the fund becoming regulated by the Australian Prudential Regulation Authority (‘APRA’); and

(b) Six months after the time that the fund would cease to be an SMSF.

The six-month time period outlined in S.17A allows a superannuation fund a period of grace to restructure if it wishes to remain a ‘self-managed superannuation fund’.

If the trustees fail to restructure the fund after the six-month period has expired, the fund will no longer be an SMSF. However, the fund will continue to be regulated by the ATO until an RSE licensee is appointed as the trustee of the fund, or the fund is wound up. If no action is taken by the trustees, the Commissioner may take action such as removal of the fund’s complying status, suspending or removing the trustee, or appointing an acting trustee. Refer to S.134.

Six-month period does not apply for new members

It is important to note that this period of grace generally does not apply if the fund ceased to be a ‘self-managed superannuation fund’ because it admitted one or more new members. Refer to S.17A(5). If this occurs, the fund will cease to be a ‘self-managed superannuation fund’ from the time of admitting the new members.

ADVISER WARNING – Failing to be a ‘resident regulated superannuation fund’

For a fund to be a complying superannuation fund, it must be a ‘resident regulated superannuation fund’ at all times during the income year. This means that if a fund fails to satisfy this definition at any time during the income year, it will automatically be a non-complying fund, and subject to penalty tax rates.

In this regard, the six-month rule in S.17A(4) does not allow a ‘period of grace’ to restructure for an SMSF that fails to a ‘resident regulated superannuation fund’. This is because the concession in S.17A(4) only applies in specified situations where the fund ceases to be a ‘self-managed superannuation fund’ – it does not apply if the fund ceases to be a ‘complying fund’ (e.g., by failing to be a resident regulated superannuation fund at all times during the income year – refer to S.42A).



easy? Think again!

However, the ATO has recently published a case study on its website10 illustrating that where mitigating factors are present (e.g., terminal illness and superannuation benefits being subject to a Family Court order), it may not make the SMSF non-complying.

EXAMPLE – Failing to meet the definition of a self-managed superannuation fund

Jim and Sarah are the only members of the JS Superannuation Fund, which is an SMSF. Both members are individual trustees of the fund.

On 1 July, Jim decides to resign as a member of the JS Superannuation Fund, and transfers his superannuation benefits to the Fall Guy SMSF. Following the transfer, Jim resigns as a trustee of the fund. This leaves Sarah as the only member of the JS Superannuation Fund.

As the fund is now a sole member fund with Sarah as the only member and the sole individual trustee, the fund does not comply with the definition of an ‘self-managed superannuation fund’ under S.17A. Refer to S.17A(2).

On 31 July of the same year, Sarah appoints Purple Pty Ltd as the trustee of the fund, with herself as the sole director of the superannuation fund. As the JS Superannuation Fund was restructured within 6 months of ceasing to satisfy S.17A, the fund will continue to meet the definition of a ‘self-managed superannuation fund’ in S.17A. Refer to S.17A(4).

Note, the fund will need to advise the ATO in writing of the trustee changes within 28 days. Refer to Reg 11.07AA.

Ceasing to be an SMSF administrative requirements

Given the significance of the trustee rules under S.17A, it is no surprise that the superannuation laws provide for significant penalties for breach of these rules, as outlined below:

(a) Requirement to notify the ATO

If the trustee has knowledge that the fund has ceased to be a ‘self managed superannuation fund’ under S.17A, the trustees are obliged under S.106A to notify the ATO. The notice must be in writing, be provided as soon as practicable, and not later than 21 days after the trustee first has knowledge that the fund has ceased to become an SMSF.

10 Refer to ‘Case Study: breaching SMSF residency rules’, available at https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-case-studies/Case-study--breaching-SMSF-residency-rules/



easy? Think again!

It is submitted that the ATO will expect that the trustees first have knowledge that the fund has ceased to be an SMSF at the time the event occurred that resulted in the fund failing to satisfy S.17A. The argument is often put forward that the trustees were not aware that there was a problem until they met with their adviser after year-end. However, the ATO has recently stated the following on its website in relation to contributions:

“We consider you are aware that a contribution is in breach of the law when you become aware of the contribution itself. This will generally be on the day you receive the contribution.

In an SMSF, all members of the fund are also trustees of the fund, so members should not make personal contributions that the fund cannot accept. Therefore, it will generally only be contributions by third parties which are at risk of being made against the requirements of the Act.”

However, it is the author’s experience that the ATO will work with trustees to resolve the situation, instead of automatically making the fund non-compliant. Naturally, if the solution proposed by the trustees is not accepted (or the proposed solution is not implemented) this would substantially increase the risk of the fund being made non-complying.

WARNING – Administrative penalty for failure to notify the ATO

Failing to notify the ATO in accordance with the requirements of S.106A is an administrative penalty (20 penalty units, or $3,400) is under the new SMSF administrative penalty regime, which commenced operation from 1 July 2014. On a practical level, trustees who largely adopt a ‘hands-off’ type approach may not be made aware that they have breached the rules until well after the 21 day period has expired, thereby leading to an inadvertent breach of the rules, and exposing the trustee to administrative penalties.

(b) Ceasing to be an SMF – Operating standard Reg 11.07A

In addition, the disclosure requirements under Reg 11.07A need to be considered where a fund ceases to be an SMSF11. Refer to Reg 11.07A(2)(a)(i). Under this standard, within 28 days of the trustee first having knowledge of the change, the Commissioner must be advised in writing of:

(a) the fund's name; and

(b) its ABN; and

(c) the name of an individual who is able to act as a contact person, and his or her telephone and facsimile numbers; and

(d) the date on which the change occurred; and

(e) if the fund has not ceased to exist--whether it has become a self managed superannuation fund; and

(f) if the fund has become a self managed superannuation fund:

11 The disclosure requirements under Reg 11.07A also apply to an SMSF the ceases to exist and also to circumstances where a fund becomes an SMSF. Refer to Reg 11.07A(2)(a)(ii) and 11.07A(2)(b).



easy? Think again!

(i) for any trustee of the fund that is an individual–his or her name, date of birth and sex; or

(ii) for any trustee that is a corporation--its name and its ABN; and

(g) if the fund has not ceased to exist, but is not a self managed superannuation fund after the change--the trustee's name and its ABN.

As Reg 11.07A is an operating standard, failure to comply with this requirement can result in an administrative penalty of $3,400 (20 penalty units) being imposed under S.166, item 1.



easy? Think again!

9. Case Study – divorce, SMSFs and failing to satisfy the definition of an SMSF

As noted above, there are a range of conditions that must be satisfied under S.17A(1) in relation to qualify as an SMSF. Furthermore, failing to satisfy any of these definitions places the fund at risk of a range of administrative penalties, together with the possibility of being made non-complying.

One area that leads to a heightened risk of compliance breaches is one ‘mum and dad’ members of an SMSF are getting divorced. In these circumstances, not only do the trustees have relationship difficulties, but ‘power struggles’ and communication breakdowns often lead to decisions made by one of more parties that can compromise the fund’s compliance with S.17A.

In this regard, it should be noted that the object of Part VIIIB of the Family Law Act 1975 is to allow superannuation to be allocated between the parties by agreement or court order. Refer to S.90MA of the Family Law Act 1975. This situation we are dealing with is slightly different – one of the parties is merely seeking to transfer their superannuation balance to a new fund.

Once these relationship problems start arising, one party may seek to exit the fund. However, may either be difficult (e.g., insufficient liquid assets to effect a transfer) or obstinate parties may seek to deny the other party the opportunity to exit the fund. However, the portability rules do not apply to SMSFs (refer to Reg 6.30), meaning that the trustees must come to an agreement themselves, seek mediation, or follow any other process outlined in their governing rules. Alternatively, the couple may be below preservation age and unable to access their superannuation benefits via a condition of release.

Although S.66(2B) does provide relief should the members choose to effect an in specie transfer12, this will not be possible where real estate is supporting the superannuation interests of both members. Furthermore, with a seventeen fold increase in limited recourse borrowing arrangements from $497m at 30 June 2009 to $8,735m at 30 June 2014, it is submitted that these funds will need to realise assets (e.g., by selling the asset subject to LRBA) to allow for this to occur.

Where a stalemate arises, and the aggrieved member’s balance remains in the fund, the author has witnessed instances of trustees ‘forcing’ the issue by resigning as trustee (or director of the corporate trustee). The natural outcome of an SMSF with two members and only one trustee (or director) is a failing to satisfy the definition of an SMSF, with a 6 month time frame to resolve the issue (or transfer the member’s balance).

12 CGT rollover relief may also be available under Subdivision 126-D of the ITAA 1997



easy? Think again!

Often, the adviser or SMSF auditor may be unaware that the fund fails to satisfy the definition of an SMSF until the 6 month period has expired. This means that the adviser is faced with a fund that has now contravened S.106A by failing to report the change in status to the ATO, place numerous breaches of the operating standards, as described above.

In these circumstances, upon advising the ATO under S.106A, in the author’s experience it is worthwhile to put forward a plan to the ATO as to how and when the fund intends to restructure to satisfy S.17A. As noted above, this may require fund assets to be liquidated to enable the rollover to occur.

EXAMPLE – Breakdown leads to compliance problems for a fund

Margaret and Thomas are both members and trustees of their SMSF. The fund’s assets comprise of $50,000 cash, and two commercial properties, each with a value of $485,000, with the fund balance totalling $1.2m. Thomas’ member balance is $750,000, whilst Margaret has a fund balance of $270,000.

Following a breakdown in their marriage, Margaret requests her fund balance to be rolled over to a new fund. Thomas objects to the immediate transfer on the basis that there is insufficient cash. He also says to Margaret that the properties are the lifeline of his business, and to sell those properties they would both suffer. There are no dispute resolution clauses contained within the deed.

As there are no compulsory portability rules, Thomas ignores Margaret’s requests to effect a transfer, promising that he will ‘deal with it soon’.

Nothing happens.

Fed-up, Margaret resigns from the fund, fully aware that this could result in non-compliance issues arising for the fund.

What can be done in these circumstances?

Following Margaret’s resignation, the fund has six months to restructure to satisfy S.17A (note, this requirement does not apply in relation to the admission of new members). Failure to restructure within this time frame, will result in the contravention of S.17A13 and a requirement for the ATO to be advised in writing of the fund ceasing to be an SMSF – refer to S.106A. The other administrative requirements outlined above should also be considered.

13 This is a reportable contravention in the Auditor Contravention Report – refer to Table 1, available from https://www.ato.gov.au/Forms/Auditor-actuary-contravention-report-instructions/?page=1#table1


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