In the past we have talked about the pros and cons of having a company as trustee of your Self Managed Superannuation Fund. However, regardless of whether your trustees are individuals or companies, you still face difficulties if one of your members is classified as a “disqualified person” under the Superannuation Industry (Supervision) Act 1993 (SISA) and is unable to act as a trustee of their SMSF.

Who can be a trustee of a self managed superannuation fund?

Anyone aged 18 or over can be a trustee of a self managed superannuation fund (SMSF) as long as they are not a “disqualified person”.  The definition of a disqualified person under subsection 120(1) of the SISA is:

• a person convicted of an offence involving dishonesty (e.g. stealing)
• a person charged with a civil penalty under the SISA
• a person who is an insolvent under administration (e.g. undischarged bankrupt), or
• a person who has been disqualified as a trustee by the Regulator (i.e. ATO)

Under subsection 120(2) of the SISA, a corporation would not be permitted to act as a corporate trustee if:

• a responsible officer of the company is a disqualified person (a responsible officer includes a director, company secretary or executive officer) – Remember each member must also be a director of the company.
• a receiver, an official manager, an administrator or a provisional liquidator has been appointed to manage the company, or
• action has commenced to wind up the company

Can a child under the age of 18 be a trustee of a SMSF?

Now just over four per cent of SMSFs established in Australia are four member funds consisting of mum, dad and two children.  As a consequence, a number of these funds happen to have members under the age of 18.

As a child under the age of 18 cannot be a trustee, they can instead appoint a parent, a legal personal representative, or a guardian to act as a trustee on their behalf.

Subsection 17A(3) of the SISA lists the following people who can potentially act as trustees of an SMSF:

• a legal personal representative can be a trustee (or director of a corporate trustee) in place of a member who is under a legal disability (e.g. an insane person or a minor under 18 years of age) or if the representative holds an enduring power of attorney in respect of the member
• a parent or guardian can be a trustee in place of a member if the member is a minor (i.e. under 18 years) and no legal personal representative has been appointed for that member
• a legal personal representative can be a trustee (or a director of a corporate trustee) in place of a deceased member, up until the time death benefits are paid from the SMSF
• the ATO as the Regulator can also appoint an acting trustee of your SMSF under section 134 of the SISA when it has suspended or removed a trustee from your SMSF

The only time that an individual cannot appoint anyone else, such as a legal personal representative, to act on their behalf is when they themselves are a disqualified person. 

Gold and Platinum Members read on for some real life examples of how past indescretions can come back to haunt SMSF Trustees and how the ATO deals with it.

What can someone do if they are a disqualified person?

Under section 126B of the SISA, if someone is a disqualified person, they can apply to the ATO for a waiver of their disqualification status.  It is advisable that this action is taken as soon as possible as it is an offence for a disqualified person to act as a trustee of an SMSF.  The potential penalty that could be imposed is imprisonment for two years (for a criminal offence) or a maximum $10,200 fine.  It is also an offence if the individual does not advise the ATO once they become a disqualified person.  The potential penalty is a maximum of $8,500.

How does someone apply for a waiver of their disqualification status?

When an individual applies for a waiver of their disqualification status the application must be in writing.  However, the individual should only consider applying for a waiver if the offence leading to them becoming a disqualified person is not an offence involving serious dishonest conduct.

Under the SISA, an offence involves serious dishonest conduct if the penalty imposed by the Court for the offence is a term of imprisonment of at least two years or a fine of at least $20,400. 

So unless the fine or penalty imposed upon a disqualified person is less than $20,400 or two years imprisonment, the application for a waiver may not be considered.

In assessing applications for waivers of disqualification status, the ATO would consider:

• the nature of the minor dishonest offence
• the time passed since the offence was committed
• the individual’s age at the time the offence was committed
• the court order in relation to the offence
• whether the individual is highly likely to not comply with the SISA and
• any other relevant matter

Common errors

The type of cases I have come across while auditing SMSFs are where members of the SMSFs are undischarged bankrupts. There have also been situations where during the course of an audit I discovered that a member was actually a disqualified person without the person realising it. It certainly pays to know that the definition of a disqualified person has a low threshold and people who may have committed minor stealing offences as teenagers may have their pasts come back to haunt them in their middle age.

To read detail of these scenarios (the names have been changed to protect privacy), please click on the links provided for (Pt) and (Au) members.

Build these documents now:

• SMSF – Deed Update
• Self Managed Superannuation Fund
• The Self Managed Super Handbook
• Investment Strategy
• Webinar Recording – Investment Restrictions for SMSFs

This article was prepared by Monica Rule. Monica is the author of The Self Managed Super Handbook: Superannuation Law for Self Managed Superannuation Funds in plain English (available from Law Central – click here).