More and more Australians are trying to protect their financial future by setting us their own self-managed super funds (SMSFs).
However, there are some interesting rules governing who is legally allowed to run them.
But very few of us understand them
Did you know that a “disqualified person” is not permitted to be a SMSF trustee?
Fair enough, you may think.
After all, trustees of self managed super funds have a great deal of control over the fund and it’s important to look after the members and their beneficiaries.
But here’s the catch: often people don’t realise they’re a disqualified person.
Or they don’t inform the Australian Taxation Office of their status, despite the fact it’s an offence to knowingly act as a trustee if you’re deemed a disqualified person.
So let’s look at how you may inadvertently fall into the disqualified person category.
1. You committed an offence
This one is easy enough to understand: if you have ever committed an offence then you may not be eligible to act as a trustee.
What kind of offence? Well, one that involved “dishonest conduct” — either here or overseas — although that can obviously be difficult to determine as Australian law doesn’t elaborate on what that covers.
But the consequences are huge. If a person convicted of a dishonest conduct offence is not able to launch a successful appeal to waive the status within 14 days of conviction, the would-be trustee is disqualified for life.
Seek professional advice if this applies to you.
2. You are an undischarged bankrupt
If you are an undischarged bankrupt — meaning you’re still going through the process of bankruptcy — then you’re disqualified from acting as a SMSF trustee.
However, once your bankruptcy period is up, you’re free to act as a trustee again.
3. You’re deemed unfit and unproper
An individual may also be disqualified as an SMSF trustee for not being a “fit and proper person”.
“Personal character is considered along with the circumstances surrounding any contraventions (of law),” according to the ATO website.
According to the ATO, trustees must act honestly in all matters concerning the fund, act in the best interests of all fund members when making decisions, and manage the fund separately from their own affairs.
They must also “know, understand and meet” their responsibilities and obligations to ensure the SMSF complies with the laws. If you violate super laws you could also be banned from being a trustee.
And if in the past you have been disqualified by a court or regulator (for example, by the Australian Prudential Regulation Authority) then you could also be disqualified as a SMSF trustee.
So what should you do if this happens to you?
The ATO advises that if a trustee is disqualified, your SMSF effectively has six months to restructure itself and the trustee will have to roll their super interest out of the fund. This means the resigning trustee cannot keep a SMSF member balance.
Generally speaking, you now have two options.
You can either roll over the disqualified person’s benefits to a large fund or convert the SMSF into a different kind of fund by appointing an APRA-approved trustee.
So as you can see, if your SMSF has a disqualified person acting as a trustee, there will be serious consequences for the membership and potentially the future of the fund.
Ignorance is not an acceptable excuse.
Make sure you check your trustees to ensure you don’t get into hot water with the ATO. And as always with all things related to superannuation, seek independent advice from suitably qualified experts.
Disclaimer: This article is general information only and is intended as educational material. The author does not intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice taking into account your circumstances and objectives.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
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