15 October 2019
By Colin Lewis
You are about to buy an investment property, or your business premises, and you’ve heard of the merits of structuring the purchase through a self-managed superannuation fund (SMSF). So, you’re looking to set one up thinking (naturally) that anyone can have an SMSF. Right?
You might be surprised to find that not everyone can have an SMSF.
For a super fund to be an SMSF under superannuation law, a member of the fund is required to be a trustee, or director of the corporate trustee.
But what if you’re ineligible to be a trustee or director?
If you are a ‘disqualified person’, you’re ineligible to be a trustee, or director of the corporate trustee, of an SMSF and if you cannot be a trustee/director, you cannot be a member. So, you can’t have an SMSF.
There are many ways you can become a disqualified person and you may not even know it. So, it’s important to be aware of the ways you may become disqualified because acting as a trustee/director while disqualified has serious consequences.
Have you ever been convicted of an offence involving dishonest conduct?
You are a disqualified person if you’ve been convicted of an offence involving dishonest conduct, and this is not confined to Australia.
Generally, if you have been convicted of an offence involving dishonest conduct then you are a disqualified person for life.
So, if you have been convicted of say a minor shoplifting offence – an offence involving dishonesty – then you’re disqualified, even if this occurred 20 years ago. Interestingly, if you had been convicted of assault then you’re not disqualified as there is no dishonest intent.
The ATO may waive your disqualified status by making an application within 14 days of the conviction. So, if you anticipate a conviction you must act quickly.
An application outside this period may still be considered if the ATO is satisfied there are exceptional circumstances that prevented you from making the application within the timeframe.
Regardless, a waiver may only be made if the offence did not involve serious dishonest conduct where the penalty is no more than two years’ imprisonment or a fine no greater than a specified amount.
It may also be possible for a person to apply to the Federal Court for a revocation of their disqualified status.
Are you subject to a civil penalty order?
You will be disqualified if a civil penalty order is made against you. Generally, civil penalties are punitive sanctions imposed by the government as restitution for wrongdoing that are imposed through civil, as opposed to criminal, procedures.
Super law contains specific civil penalty provisions. These involve the superannuation rules involving the sole purpose test, lending to members, the borrowing restrictions, illegal early release schemes, the in-house asset rules and making and maintaining investments on an arm’s length basis, and more.
In addition to the many super law provisions, you may be disqualified if you are subject to a civil penalty order under other legislation.
Are you an undischarged bankrupt?
If you are an undischarged bankrupt, again not confined to Australia, then you’re disqualified. However, once your bankruptcy period ends, you will cease to be a disqualified person unless you’re disqualified for other reasons.
Has the ATO disqualified you?
The ATO can render an SMSF trustee/director a disqualified person.
The ATO can disqualify you if you have contravened super law, but only after considering the nature or seriousness of the contravention, or number of contraventions. To date, most disqualifications relate to the illegal early release of money from SMSFs.
The ATO can also disqualify you if it’s satisfied that you are not a ‘fit and proper person’ to be an SMSF trustee/director.
As to whether you meet the ‘fit’ part of this, the ATO considers whether you have the relevant skills to be a trustee/director having regard to, among other things, your competency and the responsibilities of an SMSF trustee/director as well as your ability to answer its questions.
In determining whether you are ‘a proper person’ to be an SMSF trustee/director, the ATO considers your general behaviour, conduct, reputation and character. Factors the ATO considers in assessing this include, among other things, your willingness to comply, proper independence in carrying out the role, whether you have been sanctioned by a professional or regulatory body, management of personal debts, integrity and involvement in entities that have been wound-up. Naturally, having outstanding tax debts with the ATO or having been involved with a phoenix company won’t sit well.
What happens if you’re disqualified?
If you know you’re disqualified, you must immediately resign as trustee/director as you can no longer act in that capacity. Continuing to act as a trustee/director is an offence with substantial criminal and civil penalties.
As you cannot be a trustee/director, you’re prevented you from being a member.
It’s also an offence not to tell the ATO immediately in writing and if you are a company director, you must notify ASIC.
The law prevents your legal personal representative from being a trustee/director in your place.
What are your options if you’re disqualified?
Once an SMSF trustee/director ceases to act, the fund has six months to restructure to comply with the trustee/member requirement before it ceases to be an SMSF. So, if you become disqualified, you have two main options – rollover your benefits to an APRA-regulated super fund, e.g. industry or retail fund, or convert your SMSF into a small APRA fund by appointing an APRA approved trustee.
If you are retired after preservation age, have attained age 65 or satisfied certain other conditions of release, then you could consider withdrawing all your benefits from your SMSF.
Importantly, corrective action must occur within six months of your disqualification.
So, you must consider your eligibility to be a trustee, or a director of a corporate trustee, before establishing an SMSF and continually monitor it during the life of your fund.