so you think the trustee rules are easy? think again! · darren wynen, insyt pty ltd . session...

So you think the trustee rules are easy? Think again!

Darren Wynen, Insyt Pty Ltd

Session overview 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

2015 SMSF Association National Conference www.smsfassociation.com

1. Introduction

• “SMSFs” have been booming over a number of years • We tend to ‘skip over’ the rules in S.17A unless a major event arises (e.g.,

death or a member goes bankrupt) • However, S.17A is a crucial consideration on whether the fund is actually an

‘SMSF’ • Furthermore, there is new era of trustee accountability on our doorstep



• Important to understand the framework applying to SMSFs • The conditions to qualify as an SMSF are split across the following:

1. S.17A(1) for funds with between 2 and 5 members 2. S.17A(2) for single member funds



• Corporate trustee or individual trustee?

• Discussion on whether an individual or a corporate trustee is a ‘better’ choice is a well-traversed path

• As an added point, in my view individual trustees are more exposed to recovery action from the ATO relating to outstanding tax debts (e.g., for illegal early access)

• Only limited circumstances exist where the ATO can recover amounts from the directors

• Therefore, not as easy to recover the income tax debt from the directors



• Corporate trustees and the Part 8 associate rules

• If an SMSF (or any trust) has individual trustees, analysis of who is a Part 8 associate is considered with two hats:

1. the individual in their own right 2. the individual as trustee of the relevant trust

• Hence, if the individual is trustee, S.70B must also consider associates as

trustee

• In contrast, if a company is trustee, the analysis only occurs from the individual’s perspective



EXAMPLE – Part 8 associate rules

• Jason is a member and trustee of an SMSF

• He is also the individual trustee of a family discretionary trust

• The trust owns property jointly with Sam

• The fund wants to lend money to Sam’s daughter, Lucy



EXAMPLE – Part 8 associate rules

• Is Lucy a Part 8 associate of Jason?

• Yes, Lucy is a Part 8 associate of Jason

• This is because 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



• SMSF has between 2 and 4 members • Membership • Individual/corporate trustees • Employee condition • Remuneration restriction

• Single member SMSF • Individual trustees • Corporate trustees • Remuneration restriction



(a) Shareholding in the corporate trustee

• Sections 17A(1) and (2) do not impose any restrictions on who can be a shareholder of the corporate trustee

• Some practitioners are of the view that such amendments would contravene S.52A(2)(a)

• The issue was raised with the ATO at the NTLG Superannuation Sub-committee (June 2011)

• The ATO did not specifically state that it would cause a contravention of the SIS Act.



(b) No tiebreaker mechanism

(c) Trustee remuneration

(d) Meaning of ‘employee’ (e) Corporate trustee trading in its own right



(f) Different meaning of relative

• ‘Relative’ is defined differently for the purposes of S.17A – refer to S.17A(9) and (9A)

• In contrast, the investment rules draw on the definition contained in S.10(1), as modified by S.10(5)

• The definition of ‘relative’ contained in S.17A(9) and (9A), is broader than the definition contained in S.10(1) and (5)

• WARNING – Definition in S.17A only relevant for determining whether a fund is an SMSF



• WARNING – Definition of ‘relative’

• John is the sole member and director of a corporate trustee

• The fund lends money to Samantha, John’s ex-spouse

• Does the provision of loan contravene S.65 and S.71?

• No, because a former spouse is not included as a relative of John under S.10(1)



• Expanded meaning of relative

• The meaning of relative is expanded under S.17A(9), which provides a tracing rule

• Essentially, this provision states that if A is a child of B because of the definition of child in S.10(1), relationships are determined as if A is a natural child of B

• An adopted, step-child etc. is treated as a natural child

• This can also significantly broaden who is included as a relative for the purposes of both S.10(1) and S.17A(9)



• 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 a relative of Simone, as Hugh is a ‘parent’ because Simone is treated as a natural child of Hugh per S.17A(9A)

• This is more likely to be an issue for the investment rules



• A member cannot be remunerated for any services they provide in the capacity as trustee (or director of a corporate trustee)

• S.17B was introduced to ensure that trustees don’t use remuneration for non-trustee related duties and services to gain early access to retirement benefits

• Under S.17B, specific requirements must be satisfied:

a) appropriate qualifications and licenses

b) performed through a business

c) arm’s length terms



• Trustee remuneration and related entities

• Section 17A/17B restrictions do not apply to services performed by a related entity or relative

• WARNING – Risk of a contribution arising for unremunerated work

• May not be tax-effective to remunerate

• However, risk of contribution arising (e.g., work done to renovate a property – refer to item 7.3 of the March 2013 NTLG Superannuation Technical Sub-group


5. Who can be a trustee of an SMSF?

• Generally, any individual who is at least 18 years of age, and not under a legal disability or they are a disqualified person

• Disqualified person is defined under S.126K

• WARNING – Requirement to advise the ATO



(a) Meaning of convicted of an offence involving dishonest conduct

• The terms are not defined in the SIS Act, therefore, refer to the ordinary meaning

• Mere infringement notice should not be convicted

• Note, extended meaning of convicted in S.120(3), law of spent convictions does not apply (S.120(4)

• TIP – Confirming whether an individual is a disqualified person

• Meaning of dishonest conduct • General examples – shoplifting, making false statements, ‘tombstoning’



(b) Meaning of insolvent under administration

• Defined in S.10(1)

• WARNING – Extends to Part X arrangements



(c) Disqualification by the ATO • Commissioner may disqualify the individual under S.126A in the following two

circumstances:

1. Contravention of the SIS Act or Financial Sector (Collection of Data) Act 2001

2. Fit and proper person

• Refer also to PS LA 2006/17



• Applying to the Commissioner to waive disqualified person status

• If a person becomes a disqualified person, they cannot act as trustee

• Furthermore, an LPR cannot be appointed – refer to S.17A(10)

• Therefore, you basically cannot be a fund member

• Can apply to have this status waived, but must do this within 14 days

• Can apply outside this time frame only in exceptional circumstances (Mourched)


6. Exceptions allowing for alternative trustee appointments

Section 17A prescribes a number of limited exceptions for other trustee appointments (a) Legal personal representative of a deceased member

• A fund will not fail to be an SMSF if the LPR steps in place of the period

commencing when the member died and ending when the benefits commence to be payable

• Note, the requirement of the fund to restructure



Lessons from Ioppolo & Hesford

• The deceased and her husband were members of an SMSF

• The deceased had made 2 binding nominations, both which had lapsed

• Under her Will, the deceased requested for her superannuation to be paid to her children (not her husband)

• The dispute arose because the husband exercised discretion as trustee in deciding that the superannuation benefits should be paid to himself



The issues considered by the court were as follows: (a) Was the trustee obliged to appoint an executor?

(b) Did the trustee exercise its discretion on a bona-fide manner

(c) Could one of the plaintiffs be appointed as trustee under S.77 of the Trustee Act

(WA)?



• Decision handed down in favour of the defendant

• The court found that there was no requirement under S.17A for the executor to be appointed

• The trustee was also found to have exercised its discretion in a bona fide manner (even though the trustee was not appointed)

• Also, no reason to appoint an additional trustee



(b) legal personal representative

LPR can be appointed in either of the following circumstances:

1. Member is under a legal disability

2. The LPR has an enduring power of attorney



• Commissioner’s views in SMSFR 2010/2 • Typical situation in which an EPOA could be appointed are:

1. For the attorney to take responsibility for managing the affairs

2. Member has become incapacitated

3. The member is travelling overseas for an extended period

• Comments on general power of attorney



Some of the issues to consider:

1. Requirement to be an LPR

2. General power of attorney insufficient

3. Scope of the EPOA

4. Appointment as trustee

5. Remuneration of LPR once appointed not permitted



6. Appointment of multiple attorneys is permitted

7. One person can be trustee/director for more than one member

8. Mentally capable donors

9. Alternate directors permitted

10. Invalid EPOA



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

Typical situation in which an EPOA could be appointed are:

1. legal personal representative

2. parent or guardian

(d) acting trustee


7. Administration – consents and record keeping

• Record keeping obligations

• Change of details (operating standard – Reg 11.07AA)

• Failure to comply is an administrative penalty under S.166

• WARNING – Signing the accounts



• A fund that fails to satisfy the definition remains an SMSF until the earlier of:

a) Appointment of an RSE; or

b) Six months after it would cease to be an SMSF

• Six month period does not apply to new members

• WARNING – Failing to be a resident regulated superannuation fund



• Administrative requirements

a) notify the ATO in writing – S.106A

b) Disclosure requirements under Reg 11.07A

• Note administrative penalties


9. Case study – divorce, SMSFs and failing to be an SMSF

• Heightened area of risk is mum and dad getting divorced

• Dealing with a partner seeking to transfer their balance to a new fund

• The party may seek to exit the fund, but getting out may be difficult

• In addition, the portability rules do not apply to SMSFs and the parties may not meet a condition of release

• The trustee may force the issue by resigning as trustee


9. Case study – divorce, SMSFs and failing to be an SMSF

• Often the adviser is unaware that the period has expired

• Worthwhile submitting to the ATO a plan to rectify

• EXAMPLE – Breakdown leads to compliance problems for the fund

End of the session

Questions?


Disclaimer

© Darren Wynen, Insyt Pty Ltd 2015

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.

so you think the trustee rules are easy? think again! · darren wynen, insyt pty ltd . session...

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