AAT decision sounds warning for SMSFs
A recent decision by the Administrative Appeals Tribunal (AAT) deeming an amendment to a trust deed of a non-discretionary trust as ineffective should serve as a warning to SMSFs on the importance of formalities, says an industry lawyer.
Townsends Business & Corporate Lawyers special counsel for superannuation, Michael Hallinan, said in the case of Franke v Repatriation Commission, the AAT upheld the argument of Veterans' Affairs that an attempt to amend the trust deed of a family trust was ineffective as the formal requirements were not met.
The trust involved was a non-discretionary family trust, with the principal’s daughter as sole director of the corporate trustee.
Mr Hallinan said the principal of the trust had settled property on the trust and was the principal beneficiary of the trust.
Consequently, the income and capital of the family trust was attributable to the principal for Centrelink means-test purposes on the basis that the principal controlled the trust, Mr Hallinan explained.
The principal’s daughter or sole director of the trust, he said, attempted to remove the power of the principal to appoint and remove the trustee by attempting to amend the trust deed.
“[This] was an attempt to try and distance the father from the trust fund in order to avoid the income from it being treated as his own income for Centrelink purposes,” Mr Hallinan told SMSF Adviser.
However, the proposed amendment was ineffective, Mr Hallinan said, since it was effected as a written resolution of the sole director of the corporate trustee and not as a deed executed by the corporate trustee.
As the amendment power was conferred on the corporate trustee of the family trust and could only be exercised by the corporate trustee by means of a deed executed by the corporate trustee, the amendment was therefore held by the AAT to be ineffective.
Mr Hallinan said the very same issue could occur in an SMSF where the sole director thinks that just signing a piece of paper will be sufficient, whereas in fact the company needs to exercise the power.
While in most cases informalities would not be detected in SMSFs since there is no third party with an interest in whether an amendment is effective or not, Mr Hallinan said these problems could definitely occur when it comes to the beneficiaries of an SMSF.
“If there’s a dispute between the beneficiaries and one beneficiary’s interest turns upon whether a particular amendment was effective or not, that would be a case where, if there was a defect, then it would be highlighted because it’s in someone’s interest to point out the defect,” he said.