27/08/2014

That old saying of 'fake it till you make it' does not apply to taking on the role of trustee of an SMSF.  If you haven't done your homework you shouldn't risk faking it!  The potential to get burned is greater than ever before, particularly for non-members who become a co-Trustee or additional director of a trustee for single-member SMSFs.

The ATO has new powers to financially penalise SMSF trustees from 1 July 2014 for certain breaches of the SIS Act.  The new penalties are also applicable to non-members who are acting as a trustee or director of a corporate trustee.  

We now know that individual trustees are able to be hit with multiple penalties for a single contravention (as they are awarded on a per trustee basis), whereas corporates will receive just a single penalty for every breach for which the directors are jointly liable.  Directors of a corporate trustee should also be mindful that they could be penalised for non-compliance with the Corporations Act.  

There are a number of traps for unsuspecting new players who may just think they are a substitute player rather than being jointly responsible for all the 'team decisions'.

If a person (or 'non-member' of an SMSF) is asked to act as an individual trustee with a sole member (or director of a corporate trustee with a sole member as the other director) there are a number of issues which must be carefully considered.

First and foremost; are they a disqualified person under the SIS Act?  This is generally seen as the only step.  If they are not a disqualified person then they can be a trustee, and if they are a disqualified person then they can't be a trustee.  

The less frequently asked question is much more important; are they actually capable of understanding and running an SMSF?  If so, they should make sure that they understand the potential for personal liability if they do take up the role as trustee.  

Enquiries should be made and research conducted on the past behaviour of the SMSF before accepting the position.  The non-member may ask if there are any contravention reports which have been issued and provided to the ATO.  If so, have the issues been rectified to the ATO's satisfaction?

The ATO is yet to clarify whether a penalty notice binds the trustee/s operating the SMSF at the time of the breach occurring or at the time the penalty notice is issued.  Until it does there is a vital need for due diligence before agreeing to help out as co-trustee, particularly when you remember that trustees of SMSFs can't be paid for doing that role and therefore by taking on the position you have all the downside of possible penalties and no upside of being paid for the role.

If you need further clarification on this issue or would like us to assist in the due diligence of the fund, please contact Caroline Harley at Townsends Business & Corporate Lawyers on (02) 8296 6222.