CHAPTER 2
SO YOU'RE A TRUSTEE
Introduction
I recall an advertising campaign from the 1970s or thereabouts that opened with a voice-over saying: 'So you think you're a good driver! Try this quick quiz'. Clearly, someone from the ATO remembers the same advertisement and has applied it to SMSF trustees. At various times the ATO has conducted mini quick-quizzes on SMSF trustees to assess their level of knowledge concerning their role and responsibilities.
Unfortunately, some of the results have not been impressive. A significant proportion of the respondents couldn't give a reasonable description of the sole purpose test (see chapter 3). Others were not sure of their reporting obligations, but the most disturbing revelation by far was that some trustees of SMSFs didn't know they were trustees! No wonder Senator Sherry is concerned about the level of knowledge of SMSF trustees (see chapter 1).
Since taking on the role as regulator of SMSFs in late 1999, the ATO has made it clear that it would move through a period where education programs to help trustees understand their role and responsibilities would be the priority.
Eventually the ATO would take the view that the time for education had passed and the time for enforcement had arrived. While the ATO is continuing its education programs for SMSF trustees, auditors, accountants and others, it is also gearing up to be more pro-active on the enforcement powers it has at its disposal under SISA legislation.
The trustee declaration
The trustee declaration introduced by the ATO was referred to in chapter 1. (One would hope that after signing the declaration all new trustees would at least appreciate the fact that they are trustees!)
One of the intended outcomes for a reader of this book is to ensure you have sufficient knowledge about the superannuation system - including the legal framework and regulatory environment - so as to be able to understand what you are signing when completing the 'Self managed superannuation fund trustee declaration'.
Of course, 'old' trustees (that is, people who were a trustee of an SMSF prior to 1 July 2007) do not need to sign the declaration. However, it is wise to be familiar with what the ATO expects of 'new' trustees, as they probably have the same expectations of 'old' trustees.
The declaration opens as follows:
I understand that as an individual trustee or director of the corporate trustee of (name of super fund) I am responsible for ensuring that the fund complies with the Superannuation Industry (Supervision) Act 1993 (SISA) and other relevant legislation. The Commissioner of Taxation (the Commissioner) has the authority and responsibility for administering the legislation and enforcing the fund's compliance with the law.
If I do not comply with the legislation, the Commissioner may take the following actions:
- impose administration penalties on me
- enter into agreements with me to rectify any contraventions of the legislation
- disqualify me from being a trustee or director of a corporate trustee of any superannuation fund in the future
- remove the fund's complying status, resulting in a significant tax penalty on the fund
- prosecute me under the law, resulting in fines or imprisonment.
I must keep myself informed of changes to the legislation relevant to the operation of my fund and ensure the trust deed is kept up to date in accordance with the law and the needs of the members.
From 'Trustee declaration (NAT 71089-06.2007)', ATO, copyright Commonwealth of Australia, reproduced by permission
This book will use this opening section of the trustee declaration to go over some of the basics of the law as it applies to SMSFs. Since taking on the role as regulator of SMSFs in late 1999, the ATO has made it clear that they would move through a period when education programs to assist trustees understand their role and responsibilities would be the priority.
Trusts, trustees and SMSFs
The opening sentence of the declaration leaves the reader with no doubt as to the identity of the person making the declaration. It is being made by a person who either individually, or via their position as a director of a company, acts as the trustee of a trust that must comply with superannuation law.
A trust is a legal entity in which the legal owner of assets of the trust manages those assets for the benefit of another person or group of persons.
Trusts came into existence in the 1500s when property could not be dealt with via a person's will. This was overcome by handing legal ownership of property to a trustee, with the original owner and the owner's heirs having the right to use the property and any income from it. Legislation concerning trusts was passed by the English parliament as early as 1535.
Each of the state and territory governments in Australia has passed legislation to govern the operation of trusts. The legislation is supported by over 470 years of case law developed by the decisions of judges throughout all jurisdictions that are based on the English legal system.
Basic principles of trusts
Creation
Trusts can be created by a written document (known as expressed trusts), or they can be created by the implications derived from a set of circumstances (known as an implied trust).
Typically a trust is created by one of the following:
- a written trust document (deed) created by the settlor (the person providing the initial assets to be held in the trust) and signed by both the settlor and the trustees (the persons who will be taking legal ownership of the trust assets)
- an oral declaration (still involving a settlor and trustees)
- the will of the settlor on their death (a testamentary trust)
- a court order (for example, in family proceedings).
An SMSF is a form of express trust where most of the rules governing the fund must be written down.
Formalities
Generally, a trust requires three certainties:
1 Intention - there must be a clear intention to create a trust.
2 Subject matter - the property subject to the trust must be clearly identified. (In the case of an SMSF the property is represented by the assets of the fund purchased with the proceeds of contributions and accumulated earnings.)
3 Objects - the beneficiaries of the trust must be clearly identified, or at least ascertainable. (In the case of an SMSF the 'objects' will be the fund members and their beneficiaries.)
In addition, a trust will have trustees who are appointed to look after the subject matter (property) for the beneficiaries in accordance with a set of rules, usually written out in the 'trust deed'.
Trustees
The trustee can be either a person or a legal entity such as a company. There can be multiple trustees, in which case the trust should provide a mechanism for the trustees to make decisions. In general, a trust will not fail solely for want of a trustee; if there is no trustee, whoever has title to the trust property will be considered the trustee. A court may appoint a trustee if necessary. Subsection 19(2) of SISA specifically requires all superannuation funds to have a trustee.
The trustees will be the legal owners of the trust property. They can, for example, sign bank transactions, make investments or rent out a house (if part of the trust property). By default, being a trustee is an unpaid job. A trustee of an SMSF cannot be paid for the work they do as a trustee as per section 17(A)(1)(f) of SISA.
Beneficiaries
The beneficiaries are beneficial (or equitable) owners of the trust property. Either immediately or eventually, they will receive income from the trust property and/or they will receive the property itself. The extent of an individual beneficiary's interest depends on the wording of the trust document. Trustees of SMSFs should note that various aspects of superannuation law require them to distribute the investment income of the fund and allocate contributions made to the fund in a prescribed manner (more on this in chapter 5).
It follows that when signing the trust declaration, trustees of SMSFs are acknowledging that they hold a position as legal owner of certain property (the funds assets that represent the account balances of members) that they are required to look after for the benefit of other persons (the members).
SMSF - a special form of trust
At this point the interrelationship between trust law and superannuation law can get a little confusing. Trust law says that trust property is owned by the trustee, but the benefits must flow to the beneficiaries. Section 17A(1) of SISA says:
Subject to this section, a superannuation fund, other than a fund with only one member, is a self managed superannuation fund if and only if it satisfies the following conditions:
(a) It has fewer than five members;
(b) If the trustees of the fund are individuals - each individual trustee of the fund is a member of the fund;
(c) If the trustee of the fund is a body corporate - each director of the body corporate is a member of the fund;
(d) Each member of the fund:
i. Is a trustee of the fund; or
ii. If the trustee of the fund is a body corporate - is a director of the body corporate.
(e) No member of the fund is an employee of another member of the fund, unless the members...
