Introduction

The arsenal of weapons available to the Australian Taxation Office (ATO) for dealing with non-compliance in the self-managed superannuation sector includes disqualifying an individual from acting as the trustee of an SMSF or a director of the fund’s corporate trustee.  In the 12 month period ending 30 June 2015 the ATO disqualified 663 individuals. This is an increase of approximately 13% from the preceding 12 month period (585 individuals disqualified) and more than double the number disqualified in the 2010-11 year (330 individuals) (https://annualreport.ato.gov.au/02-performance-reporting/delivering-our-activities/securing-retirement-income/self-managed).

Disqualification is an attractive option for the ATO.  For obvious reasons and for reasons not immediately apparent to those who have not been caught in the disqualification net, it is not so good for the disqualified individual. 

Disqualification

Disqualification under the Superannuation Industry (Supervision) Act 1993 (SISA) can arise by operation of the law or at the discretion of the Commissioner. This article concerns the latter scenario, specifically, where the Commissioner considers that an individual is “… not a fit and proper person to be a trustee … or a responsible officer of a body corporate that is a trustee …” (SISA, subsection 126A(3)).

Matters that the Commissioner will take into account when considering disqualification under s126A(3) include not only contraventions of the SISA but: 

  • matters “which go to establishing the character and repute of the person”;
  • “non-compliance with other taxation laws”; 
  • the person’s conduct with respect to “laws dealing with financial responsibilities, honesty and business transactions”;  and
  • the person’s “honesty, competence, diligence, knowledge and ability,soundness of judgment, reputation and character”

(PS LA 2006/17, para 14).

Practical effects

Timing

Disqualification under subsection 126A(3) has effect from the date on which notice of the disqualification is given. 

While the ATO advises that, “as a general rule, prior to disqualifying an individual the Commissioner should allow the individual to preserve their benefits (para 16, PS LA 2006/17), this is neither the law nor a “cast iron” guarantee to fund trustees.  An individual may be the subject of a disqualification notice notwithstanding that as a consequence of the disqualification the fund is left without a trustee to attend to necessary or desirable actions (e.g., the lodging of tax returns for the fund, the conversion of the fund to a small APRA fund or the winding up of the fund).

Duration

Disqualification will operate for an indefinite period, putting the onus on the disqualified individual to instigate the necessary dealings should the individual wish to have the disqualification revoked.  This can be a time consuming, emotionally draining and expensive process. 

Offence

It is an offence for an individual who knows that they are a disqualified person to act as the trustee of an SMSF, a responsible officer of a body corporate that is a trustee of an SMSF, an investment manager or a custodian of an SMSF (SISA, s126K).  Penalties available for contravention of s126K of the SISA include (where applicable) 2 years imprisonment.

Where disqualification has left an SMSF without a trustee the ATO may issue a letter of comfort.  One seen by this writer provides that the Commissioner will not commence investigation of “lawful acts” necessary to be undertaken to wind up the fund.  (The use of the word “lawful” is, presumably, meant to refer to acts lawful but for the disqualification.)  Any such letter is not a release from s126K of the SISA, so that, on the face of it, it puts the disqualified person in the position of either acting as a trustee in breach of the law – not an option that a lawyer can recommend - or relying on third parties to act on the instruction of a disqualified person.

The “it wasn’t me” defence

If there is more than one trustee and the additional trustee(s) has not taken any active steps to prevent breaches of the SISA, or actively engaged with the ATO to explain their position to the ATO’s satisfaction, then the additional trustee(s) may find that they, too, are the subject of a disqualification notice.  That is, “head in the sand” = guilty.

Publication

On decision to disqualify, the ATO will issue a notice to the “target” individual.  The notice will state the target’s name, include a statement to the effect that, in the view of the ATO, you have contravened the law and will be published in the Government Notices Gazette (Gazette). The Gazette is published electronically and can be easily accessed by an internet search.  Put another way, if you are disqualified an online search against your name will – in the usual course – reveal to the world at large (including employers, colleagues, clients, family and friends) your disqualified and “law breaker” status.

A disqualification may be revoked in certain circumstances. A revocation will also be published, however, there is no obligation on the ATO to remove the original disqualification decision from the world wide web.

Conclusion

Sometimes things go wrong in life. If they go wrong in SMSF administration the individuals in charge of the SMSF at the time would be well served to proceed on the basis that they may be in the frame for disqualification by the Commissioner, and get a suitably qualified professional on board to address that possible outcome. Failing to address that possibility properly and in a timely manner could end up being a mistake the expense of which will sit with the impugned individual long after that individual has abandoned any desire for engagement with the SMSF sector.