An industry lawyer has emphasised the importance for trustees to pursue an illegal drawdown from an SMSF in order to mitigate any punitive action the regulator might take against them as a result of the compliance breach at hand.
“If [a trustee] pursues [the member who made an illegal drawdown from the SMSF] for recovery, doesn’t that help reinforce the character of the relationship? The illegality [the pursuing trustee] is judging what [the trustee who has committed the breach] has done,” Bobbin Lawyers consultant lawyer Peter Bobbin told delegates at the recent SMSF Association Technical Summit 2024 held in Sydney.
“Might that not help us to recognise that there is a breach of fiduciary duty by [the trustee who made the withdrawal] in respect of [the trustee trying to recover the money involved] as a member of the fund and that breach of fiduciary duty may just be sufficient to invoke 700 to 800 years of trust law?
“If but for nothing else it means that the ATO targets [the trustee who made the illegal withdrawal] and not [the trustee trying to recover that money] and maybe there is not a banning order [applied to the pursuing trustee]. Maybe there is not an imposition of penalties upon [that trustee].”
According to Bobbin, trustees should take this course of action even if they know the money is not recoverable because it has already been spent.
“When [the money in question] is unrepayable because [the other trustee] gambled it, don’t forgive [the debt], go through a recovery process,” he recommended.
“In fact, interestingly, follow the ATO debt write-off rules and then write it off because [the SMSF] is a constructive trust, it belongs to the fund. You then reduce the value of the asset to its recoverable value and that to me seems like a proper accounting treatment.”
One of the upcoming SMSF Association events is SMSF Trustee Empowerment Day 2024, co-hosted with smstrusteenews, the sister publication of selfmanagedsuper. To find out more information about this two-city roadshow and encourage any trustees you know for which it would be suitable to register, please visit SMSFTED.
