Based on my own observations and recent statistics, more and more trustees do not have a decent understanding of their roles and responsibilities as trustees. Many believe their accountant or adviser has ‘their back’, not appreciating the ultimate responsibility for the prudential management and compliance of the fund stops with them. On top of this, many trustees have signed the trustee declaration without a full understanding of what the purpose and ramifications of this document are.
The trustee declaration has been in place from 30 June 2007. Since this date, it has been a requirement under section 104A of the Superannuation Industry (Supervision) (SIS) Act for new trustees or directors of a corporate trustee of an SMSF to sign the declaration. The declaration must be signed within 21 days of becoming a trustee/director.
Similar requirements also apply to new trustees/directors of SMSFs that were in existence prior to 30 June 2007. The declarations must be kept for a minimum period of 10 years and must be available for inspection by a staff member of the ATO.
The declaration is also required to be signed if a trustee/director has undertaken an ATO-approved course of education in compliance with an education direction or is a legal personal representative who has been appointed as trustee on behalf of a:
- member who is under a legal disability (usually a member under 18 years old),
- member for whom you hold an enduring power of attorney, or
- deceased member.
Section 166 of the SIS Act imposes an administrative penalty for a contravention of any of these conditions. It is a strict liability provision and carries 50 penalty units or $9000 based on the updated administrative penalty provisions.
The purpose of the trustee declaration is to ensure new trustees understand their obligations and responsibilities. However, on close review of the document it requires a lot more. For a two-page document it holds a lot of punch.
After the trustee fills in their name, the next line declares they are “responsible for ensuring that the fund complies with the Superannuation Industry (Supervision) Act 1993 and other relevant legislation”. This is a significant undertaking on which to sign off. The majority of trustees do not even know what this act is, let alone what specific provisions are held within it.
The next part of the declaration is a trustee signing off and agreeing to the fact they must keep themselves informed of relevant changes to the legislation in relation to the operation of their fund and to ensure they keep their trust deed up to date. Trustees then acknowledge via the declaration that, if they do not comply with the legislation, they give the commissioner permission to hand down any of their compliance powers as per listed in the declaration. This includes disqualification, having the fund made non-complying or even prosecution.
It then moves to acknowledgement of the sole purpose test and compliance at all times with the trustee covenants. These covenants are imposed on trustees under general trust law, whether included in the trust deed of the fund or not. This also includes the requirement to prepare, implement and regularly review an investment strategy as well making consideration on whether the trustees should hold insurance cover for the members of the fund.
The power of the declaration still continues. It then requires the trustees to understand and concede to the compliance of the contribution, payment of benefits and investment restriction rules, including borrowing, in-house assets, arm’s-length rules and the like. It then lists a series of administrative rules the trustees must understand and adhere to. Finally a trustee must sign and have the signature witnessed by someone over the age of 18.
Even if the document does not get signed, retained or witnessed for whatever reason, this does not absolve the trustee/director from liability if breaches of the provisions outlined in the declaration eventuate.
This two-page document holds immense power and, if not adhered to, can be a very expensive and arduous event.
It is critical your trustee clients are made fully aware of the importance and content of this declaration and continual trustee education is provided so they are not only fully aware of their roles and responsibilities, but also what can happen if things go wrong.