28/07/2015

What happens when the ATO disqualifies one or more trustees of an SMSF and these people decide that the running of the SMSF is no longer their business?

The trust deed or the SIS Act may automatically disqualify a person from acting as trustee (reference to a trustee also includes a reference to a director of a corporate trustee) for various reasons. Alternatively the ATO has the power to disqualify a trustee or it can apply to the Court for such order.

Once they have been disqualified, a person must immediately cease to act as trustee and the remaining trustee(s) has six months to take the necessary action to comply with the SIS rules.  A person who continues to act as trustee after being disqualified may face criminal prosecution.

In the event of trustee disqualification, the following options are generally available:

1.    if the disqualified trustee was also a member of the SMSF, the remaining trustee can roll over or pay out (if eligible) the superannuation interest of the member (the person cannot attempt to remain a member by having someone who holds an enduring power of attorney act as trustee in their place as this is expressly prohibited by s17A(10));
2.    a new trustee is appointed in the place of the disqualified trustee;
3.    the SMSF becomes a small APRA fund by appointing a registrable superannuation entity licensee as trustee; or
4.    the SMSF is wound up.

Depending on the provisions of the trust deed, generally the disqualified trustee is not able to participate in the process of appointing their replacement or of winding up the SMSF.  This means that as long as there is at least one remaining trustee in charge, the disqualified trustee’s unwillingness to co-operate may not be that big a hurdle.

If however all of the SMSF trustees are disqualified and refuse to sign any documentation either to appoint a new trustee or to wind up the SMSF, the Regulator of SMSFs may have to step in.  The ATO has the power under s133 to suspend or remove one or several trustee(s) who have been disqualified or whose proposed conduct may endanger the financial position of the SMSF.  While there is little information on how to instigate this action by the ATO, presumably a concerned third party, such as the SMSF administrator or adviser could make such request.

If the ATO exercises this power, it then has an obligation under s134 to appoint either an individual trustee or a company (e.g. a professional trustee) during the suspension period or until the vacancy in the office of trustee is filled.  This person or company is called an ‘acting trustee’ and is responsible for getting the SMSF’s affairs in order and/or winding it up.  

The appointment of an acting trustee will not cause the fund to cease to satisfy the definition of a self managed superannuation fund by virtue of s17A(3)(d).

Interestingly, the ATO determines the terms and conditions applying to the appointment of the acting trustee and has the ability to make a determination that the acting trustee be financially remunerated for their work.  These fees are payable from the assets of the SMSF.

If the ATO declines to remove/suspend a trustee, another possible course of action is to apply to the Supreme Court for an order to remove and/or appoint a new trustee (under the relevant Trustee Act).  This however is a costly and time-consuming process.

If the trustees decide to do nothing until all the funds in the SMSF are gone, is the SMSF automatically terminated?  While at law a trust terminates when there is no longer any trust property, the trustees still have some administrative duties to undertake, including notifying the relevant authorities, attending to the payment of the SMSF’s liabilities and lodging a tax return for each financial year in which the SMSF has been in existence.  In light of the current penalty regime which renders trustees personally liable for the payment of administrative fines, being difficult and uncooperative may end up costing the trustees a lot more than they bargained for!

Some issues still remain uncertain:

If it is not possible for a trust to be without a trustee, but all trustees are disqualified, does it mean they no longer are SMSF trustees but still remain as bare trustees of the SMSF assets until these have been dealt with (i.e. by choosing one of the above mentioned options)? There is no case law or ATO guidance on this issue.

Also, in certain circumstances, a stubborn attitude and refusal to perform their duties could result in a nasty surprise for the trustees. For instance, in the case of a corporate trustee with a sole director and shareholder, if a trustee in bankruptcy is appointed to administer the director’s property, the company constitution may allow the trustee in bankruptcy to appoint itself as a director of the company (s201F of the Corporations Act).

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.