SMSF members who may be a liability to a fund as a trustee should not hold that role but should be replaced by someone acting on their behalf, an SMSF expert has claimed.
LightYear Docs chief executive Grant Abbott said while section 17A(1) of the Superannuation Industry (Supervision) (SIS) Act 1993 requires all members of a superannuation fund to be trustees of the fund for it to be an SMSF, not all members of the fund should be trustees.
Abbott said the “all members must be trustees rule” did not work for every SMSF member and should not be a formality for new or existing SMSFs, and that acting as a trustee required a level of responsibility, as well as time to manage the fund and an understanding of the compliance issues involved.
“If we were interviewing for the role, how many of the 1.1 million SMSF fund members would make the grade?” he said.
“The [ATO] commissioner’s recent aggressive stance on investment strategies, targeting SMSF trustees by direct letter and threats of a $4200 fine, struck fear into many trustees and how many wondered whether it was all worth it?”
He pointed out the definition of an SMSF within the SIS Act was flexible enough to allow a member’s attorney to take their place as trustee or director of the fund’s corporate trustee where the member had an enduring power of attorney (EPOA).
“This can apply right from the get go and should be a key, if not the core question when setting up a fund. If a member is not financially wise or adept, then pass the trusteeship on to a trustee that has the right mindset and motivation with an EPOA that commences immediately, not on incapacity,” he said.
He pointed out a “special-purpose superannuation EPOA” would not require an incapacity of the member to be put into effect, but rather when a member did not want to act as a trustee.
The process of appointing an EPOA as a replacement trustee or replacement director of a corporate trustee in the case of a member not wanting to be a trustee was outlined by the tax commissioner in Self Managed Superannuation Funds Ruling 2010/2, he said.
“What could be a better solution for advisers and trustees than only knowledgeable and responsible trustees putting their hand up for trusteeship?” he said.
“We get asked all the time what to do and our answer is simple. For new and existing SMSFs where a member may be a liability in terms of responsibility, understanding and compliance, replace them. Transfer the responsibility to those trustees that want it and can handle any ATO interaction.
“Importantly, all SMSF trustees must act in the best interests and to benefit all members of the fund, which is enshrined in section 52B of the SIS Act with significant penalties for not doing so. So there is nothing to lose, but a lot of freedom to gain by not acting as a member trustee of a SMSF.”