Check ejection strategy before adding members

eject SMSF member

An SMSF planning to eject a member must ensure they are informed about the process from the outset and it is included in the fund’s admissions criteria.

SMSF trustees planning on adding more members to their fund under the proposed six-member rule changes should reassess the admission criteria that will be used and how existing and new members can act if they wish to eject a member in the future.

Townsends Business & Corporate Lawyers superannuation online services division managing solicitor Jeff Song noted that while the trust deed of an SMSF and the constitution of a corporate trustee would play a role in how fund could eject a member, the admission documents to the corporate trust also need to be clear as to how a member will be treated when forced to exit a fund.

“The current trust deed might provide a mechanism for removing a member by giving the trustee or the member(s) with the majority balance the power to remove a member,” Song said in an update on the legal firm’s website.

“If the power is in the trustee, the constitution of the corporate trustee needs to be checked to see how the directors can validly make decisions for the company.”

He added that where a constitution required unanimous agreement of all directors, it was unlikely a member would agree to remove themselves as a member of the fund, but where it only required a decision by majority votes, either as a single vote per member or proportionate to their balance in the fund, the member could be removed.

The removal process did not end here as the exiting member’s balance also had to be taken out of the fund and it was at this point admission criteria and documentation would be important, he said.

He said in order to implement a decision to remove a member, the trustee had to be able to pay their benefits out of the fund into another regulated superannuation fund.

“Superannuation Industry (Supervision) Regulations expressly state that a member’s benefits in a fund must not be rolled over from the fund without the member’s consent to the rollover,” he said.

“This means the fund is unable to give effect to its decision to remove a member if [the member] doesn’t consent to his balance being rolled over to another fund.”

There was an implied consent from the member upon their admission into the fund that they would be bound by the governing rules in the deed, which also provides a mechanism for their removal, he noted.

“However, there is a level of risk in relying on this argument as it can be uncertain whether the governing rules, the member’s admission documents and other circumstances giving rise to the implied consent are sufficient to satisfy the ‘consent’ requirement under the regulations,” he pointed out.

“While the term consent is not defined in the regulations, appropriately drafted governing rules and member admission documents may prove to be effective in satisfying this consent requirement.”

While six-member funds have still yet to become law, he suggested trustees considering these types of funds should seek early advice to prepare themselves for possible disputes in the future.

“They should also ensure that the draftsman of the fund’s trust deed has considered these possibilities and prepared the deed accordingly,” he said.

Other SMSF experts have also flagged SMSFs will require changes to make full use of the six-member rules, including a shift to a corporate trustee, and an awareness that adding or removing members will take the funds offline for as long as the ATO takes to process membership changes.

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