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Pitfalls loom in SMSF ‘except’ clauses

The definition of an SMSF should be a straightforward concept, but a number of legal determinations and exceptions have clouded this picture, presenting potential issues for the fund, the trustee and the adviser.

In his presentation at the 2016 SMSF Association National Conference in Adelaide today, Miller Super Solutions founder Tim Miller said advisers needed to be aware of the impact the word ‘except’ had on the SMSF industry.

“The definition of an SMSF looks pretty simple: all members must be trustees, all trustees must be members,” Miller said.

“If the paragraph stopped there, it would be fine, but then it says the word ‘except’.

“‘Except’ pops up a lot in law and we need to be able to deal with those ‘except’ situations.”

Those situations were likely to happen at some stage in the SMSF life cycle, so it was imperative advisers planned ahead for the likelihood of their occurrence, he said.

In particular, special focus needed to be given to the concept of enduring power of attorney (EPOA), which was a common stumbling block in defining SMSF members and trustees, he said.

“The exception to that [SMSF member definition] rule is when it talks about other people who can become or act as a trustee in place of the member,” he said.

“This is where the definition adds its complexities, and this is where as we transition through life we have to take consideration of who those people are, and the key one I want to highlight here is the enduring power of attorney.”

He warned that unless a prospective client already had a will and an EPOA, advisers should not be talking to them about establishing an SMSF.

“They have no idea who’s going to look after their affairs in the event that something happens, and an event will happen,” he said.

“We have to pre-plan for that and it’s a conversation you want to have with your executor, with your legal personal representative.

“Regardless if we’re talking about death or if we’re talking about disablement, we need to have someone else there who can come in and talk in that capacity.”

It was useful to think of a trusteeship as a single concept, as regardless of how many members were in the fund, they had to come to a common decision to move the fund forward, he said.

“You want people who can have an active discussion, but can come to an agreement, because otherwise what you have is a stagnant SMSF sitting there doing nothing,” he said.

“And that doing nothing could be costing the fund penalties from an investment return position, or even from a tax lodgement point of view.”

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