It is not and has never been the case that in all circumstances that all members of a SMSF must be trustees or directors of the corporate trustee of the Fund.
This is crucial for members who have lost capacity, have gone overseas or simply do not want the responsibility of acting as a trustee of the Fund. And with more than 3,000 pages of legislation, ASIC and ATO rulings on the subject who can blame them.
2. Why SMSF trusteeship is optional
Section 17A(1) requires, at first glance, that all members be a trustee or director of the corporate trustee of the Fund. BUT section 17A(3)(b)(ii) of the SIS Act 93 provides for a specific exclusion to the member/trustee rule where the person, acting as trustee, holds the member’s EPOA. In practice this means that we may have a four-member SMSF – 80 year old Dad, 78 year old Mum, Son aged 50 and his spouse aged 45 with only the Son acting as trustee of the four-member SMSF. How does that happen? Simple. The Son has the EPOA for each of the other members of the Fund.
3. The ATO view
The Commissioner of Taxation has issued extensive guidelines on EPOAs and trusteeship – see SMSFR 2010/2. The ruling provides authority for the above scenario and even goes one step further enabling a retired accountant who is not a member of the fund to act as the sole trustee of a two-member SMSF!
In SMSFR 2010/2 the Commissioner shows how two members of a fund are replaced by their friend who is not a member of the fund as trustee. Of course, specific EPOAs are required in this regard as does the fund’s deed need to empower this type of trustee appointment. And if a corporate trustee is being employed for the SMSF then the constitution should also have the capacity to appoint a Replacement Trustee (EPOA) as the Commissioner notes that holding an EPOA does not authorise an appointment as a director.
The following example from SMSFR 2010/2 shows how trusteeship is not limited to even members of a fund.
Example 1
- Andrew works for a large international group of companies. He and his wife, Jane, are trustees and members of their SMSF. From 1 February 2009 Andrew is transferred to an overseas company for an indefinite period of time. In accordance with the relevant State legislation, Andrew and his wife each execute an enduring power of attorney in favour of their friend and retired accountant, Trevor. In addition, Andrew and Jane both resign as trustees of their SMSF and appoint Trevor as the trustee. The appointment of Trevor as trustee is in accordance with the terms of the trust deed. Other than the fact that Andrew and Jane are not trustees of the SMSF, the superannuation fund satisfies the other requirements of the definition of an SMSF in subsection 17A(1).
- Trevor is a legal personal representative of both of the members, Andrew and Jane, by virtue of holding an enduring power of attorney in respect of each of them. In addition, Trevor is now the trustee of the SMSF in place of both Andrew and Jane. Once appointed as trustee, Trevor is subject to civil and criminal penalties in the event that he breaches his duties. Provided that the enduring power of attorney remains valid during the period Trevor is the trustee and given that the other requirements of subparagraph 17A(3)(b)(ii) are satisfied, the superannuation fund continues to satisfy the definition of an SMSF in subsection 17A(1), notwithstanding that Andrew and Jane are no longer trustees.
Note: Trevor cannot take a fee as remuneration for acting as the Trustee as this breaches section 17A(1) of the SIS Act 93.
With six-member SMSFs soon to be introduced expect the use of what we call at I Love SMSF and LightYear Docs in our deeds and corporate trustees, the Replacement Trustees or Replacement Directors to become more popular as younger generations look after older members in the fund. Plus with six members, getting signatures or advising to all the Trustees can be problematic.
4. But what if the Trustee only benefits themselves
The SIS Act 93 looks after all superannuation funds from Australian Super with millions of members to small APRA funds and SMSFs. There are rules around the role a Trustee must take. In that regard, amongst other things, section 52B provides for SMSFs that:
Each trustee of the fund convenants to:
- to act honestly in all matters concerning the fund;
- to exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;
- to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries.
Failure to do so results in the trustee of the SMSF breaching section 54C thereby enabling the member so sue the trustee for loss or damages under section 55(3).
5. The Adviser’s Role
As an adviser to the Trustee of the Fund you must start any structuring of the Fund with a discussion on the responsibilities of acting as a Trustee of the Fund, the potential of being fined with an administrative penalty or called or receive correspondence by the ATO on issues to do with the fund (remember the investment strategy letters). If a client says “no” to trusteeship then that is the way it should be and find a member of the Fund that will act as their Replacement Trustee.
For current SMSFs, it is wise at the next review to affirm that all trustees want to continue to act as a trustee. If not, then restructure the Fund. It makes your life easier and at the same time saves them from the dangers of being a trustee.