SMSF deeds should define what it means to be a member of a fund, particularly in the event of death, as that term is not strictly defined under superannuation law and has been the subject of number of notable legal actions, a specialist lawyer has noted.
DBA Lawyers senior associate William Fettes pointed out while case law and the ATO commissioner have made significant commentary on SMSF membership the Superannuation Industry (Supervision) (SIS) Act and regulations did not set out specific details.
“We have legislation and regulations so you would think there would be some sort of clear consensus on what a member is,” Fettes said during a webinar late last week.
“No, not so fast. It’s true to say there is not a meaningful definition of a member in the SIS legislation or regulations.
“If you are in receipt of a pension from an SMSF, you are deemed to be a member or required to be a member according to section 10(3) of the SIS Act.
“Other than that, it’s a bit fluid in regards to what membership means.”
Fettes highlighted the issue of membership was important when a member died because in the case of a two-person fund with individual trustees, does that person cease to be a member automatically and would their legal personal representative (LPR) be able to step in on their behalf.
“It’s a bit unclear and unfortunately we have conflicting judicial commentary on this issue,” he said.
“We don’t have any cases that were decided with precedent values. There is no ratio decidendi, as we say in legal terminology, weighing in on what membership means in the context of death, for example.
“So our approach at DBA is that you might have a deed that makes it clear that membership ceases on death.
“If that’s what your deed provides, there is a basis for some sort of automatic transition from two members to a single member.
“For deeds that provide something different, and it is pretty common to see membership ceasing only when a member has died and death benefits have been cashed out, that would be the termination of the membership.
“I think it’s comfortable to say membership persists in that scenario and that gives some purpose to the exception in section 17A(3a) [of the SIS Act] of why you might, from a compliance point of view, need to have a deceased member represented at the trustee level by an LPR because there is a notional member that is still there.”
