Changing the trustee of a self-managed superannuation fund (SMSF) is critically important. SMSF deeds differ significantly in how a change of trustee is to be implemented, write Jared Lynch and Bryce Figot.
A failure to comply with change of trustee requirements may mean that the trustee of an SMSF has not been validly changed.
In this article we examine a case in which a change of trustee was found to be ineffective and as a result, the trustee office was determined to be vacant. We then outline some key considerations that arise with any change of trustee.
Moss Super
The case of Moss Super Pty Ltd v Hayne [2008] VSC 158 provides an example of why it is important to correctly draft the documentation changing the trustee of an SMSF. The case involved a dispute over the benefits of a deceased SMSF member, Mr Hayne.
Before his death, Mr Hayne was in a relationship with Ms Moss. Both Mr Hayne and Ms Moss were the sole members of an SMSF.
In the period following Mr Hayne's death the corporate trustee of the SMSF had two directors (Ms Moss and Mr Hayne's lawyer) and a single member (Ms Moss).
Documents were then executed to change the trustee of the SMSF to Moss Super Pty Ltd (a company of which Ms Moss was the sole director). The change of trustee consisted of documentation executed by:
- The 'old' trustee, resigning as trustee of the SMSF; and
- Ms Moss as the sole member appointing the Moss Super Pty Ltd as the 'new' trustee.
Mr Hayne also had children from a prior relationship and the change of trustee to Moss Super Pty Ltd was challenged.
Decision
In determining whether or not the change of trustee was valid, Byrne J paid close attention to the terms of the SMSF's deed.
The SMSF's deed referred to a party it defined as the 'founder' and required the founder to appoint any new trustees. Ms Moss was a director of the founder.
Despite successfully resigning from the company as trustee and signing the relevant change of trustee documentation as the sole remaining member and as director of Moss Super Pty Ltd, Ms Moss did not comply with the deed.
Critically, the change of trustee documentation was not executed by the founder (even though Ms Moss signed the documentation, it was not in her capacity as director of the founder). At the risk of oversimplifying: the right signature was there (ie, Ms Moss' signature) but the wrong header appeared above it.
Byrne J found that:
If parties have, no doubt for good reason, established a complicated legal structure such as this, they must respect it. And where they have, as here, multiple roles to play they must respect the conflicts which may arise.
As a result the change of trustee was not valid and Moss Super Pty Ltd was not the trustee of the SMSF but rather 'the office of Trustee remained and remains vacant'.
This can be disastrous for clients as well as leading to uncertainty and confusion.
Differences in change of trustee powers
A 'trustee's most fundamental duty is to comply with the terms of the trust' (Commissioner of Taxation v Interhealth Energies Pty Ltd [2012] FCA 120 [13]).
Accordingly, reference must be made to an SMSF's deed to ascertain the requirements for changing the trustee. Every deed is different and even those from the same deed supplier often change over time.
Some deeds will require a particular sequence of events; some require the consent of a founder or another party; some will not allow a change from a corporate trustee to individual trustees or vice versa; and some may require written notice to be provided in advance to the members of the SMSF to change a trustee.
This means that it is critical that the specific SMSF's deed be consulted when changing the trustee of an SMSF.
While the above generally applies to all trusts, in the case of SMSFs, the Superannuation Industry (Supervision) Act 1993 (Cth) ('SISA') must also be considered.
The SISA imposes an additional regulatory framework in relation to trustees of SMSFs and the following should always be borne in mind when changing the trustee:
Trustee-member rules
Section 17A of the SISA provides the definition of an SMSF. The definition is extensive to cater for all the possible permutations of how an SMSF can be structured.
However, broadly speaking, all the members of an SMSF must be trustees or directors of a corporate trustee of an SMSF. The reverse is also typically true.
Correctly timing changes of trustee and admission of members
The timing of a change of trustee and any change in the membership of an SMSF is also important. Section 17A of the SISA allows an SMSF a 'grace period' of six months to make the appropriate changes to trustees or members before it ceases to be an SMSF.
However, the 'grace period' does not apply where an individual is admitted as a member without first being appointed as a trustee or director of a corporate trustee. In this case the SMSF immediately fails to qualify as an SMSF, so the timing is critical.
Therefore care should be taken to ensure that a change of trustee occurs before an individual is admitted as a member of an SMSF.
Written consent required
Section 118 of the SISA provides that an individual is not eligible for appointment as a trustee or director of a corporate trustee of an SMSF unless they have consented to the appointment in writing.
Disqualified persons
Section 126K of the SISA prohibits 'disqualified persons' from being appointed as trustees or directors of corporate trustees of SMSFs.
A disqualified person broadly includes anyone convicted of an offence of dishonesty, and undischarged bankrupts.
The penalty for a disqualified person acting as a trustee or director of a corporate trustee of an SMSF is prescribed as two years in prison or a fine of $10,200.
Accordingly, it should be considered whether or not a new trustee or director of a corporate trustee might be a disqualified person.
There is also a common misconception that the six month 'grace period' applies to disqualified persons.
This is not the case, and trustees or directors of corporate trustees facing bankruptcy should be removed in advance to ensure they do not contravene the SISA.
Trustee declaration
Since 2007, all people becoming trustees and directors of corporate trustees of SMSFs must sign a declaration in the approved form confirming that they understand their duties (see section 104A of the SISA).
The approved form is the ATO 'Trustee Declaration' (NAT 71089). The form must be signed within 21 days of their appointment.
Further, trustees are required to retain the declaration for at least 10 years and, if requested, be able to provide the declaration for inspection by the ATO.
Conclusion
The above are some of the various considerations that arise when changing the trustee of an SMSF. Advice should always be sought from an appropriately qualified professional if there is ever any doubt.
Jared Lynch is a trainee lawyer and Bryce Figot is a director at DBA Lawyers.
Originally published by SMSF Essentials.
