Trustees and advisers should be mindful that they could fail to meet the definition of an SMSF under the Superannuation Industry (Supervision) (SIS) Act when admitting new members to a fund, according to DBA Lawyers.
DBA Lawyers associates Kimberley Noah and William Fettes said while a six-month grace period under section 17A(4) of the SIS Act applies to changes in the member composition of a fund, the admission of new members was an exception to the rule that trustees and advisers needed to be wary of.
“Section 17A(5) provides that the six-month grace period does not apply in respect of a failure of the basic conditions caused by one or more new members being admitted to an SMSF,” Noah and Fettes said in an article on the DBA Lawyers website.
“On a practical level, this means that a prospective new fund member must always be appointed as a trustee/director before their admission as an SMSF member.”
They noted that timing and order relating to member admission were crucial factors to be considered by trustees and advisers, and a failure to comply with the rules of section 17A when admitting new fund members would instantly result in the fund ceasing to meet the definition of an SMSF.
“If prompt action is not taken, the fund exposes itself to the inherent risk of having its complying status removed by the ATO,” they said.
They warned funds that lost their complying status would be subject to the highest marginal tax rate and would be taxed on both income and the market value of assets.
“When you compare this tax outcome to the 15 per cent that generally applies to the low tax component of complying funds, the importance of meeting the SMSF definition immediately becomes crystal clear,” they added.
