SMSF trustees and dishonest conduct
Many do not realise the extent of the disqualified person provisions in the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’).
This can result in a person inadvertently acting as a trustee of an SMSF while disqualified. Doing so exposes the trustee to significant penalties. We explore some of the nuances of the disqualified person provisions and some practical steps to ensure advisers are aware of the risks and ensure their clients do not act as SMSF trustees while disqualified.
Certain persons disqualified from acting as trustees
The SISA prohibits certain ‘disqualified’ persons from acting as trustees of SMSFs. We consider this an individual who has been convicted of an offence involving dishonest conduct and is therefore disqualified from being a trustee of an SMSF under section 120 of the SISA.
This prohibition also precludes such individuals from acting as directors of corporate trustees of SMSFs. For simplicity, I will simply refer to a trustee from now on, which also includes a reference to a director of a corporate trustee.
What does ‘dishonest’ mean?
The term ‘dishonest’ is not defined in the SISA and therefore takes on its ordinary meaning. The Criminal Code Act 1995 (Cth) provides an interpretation, albeit in a different context, defining dishonesty by reference to the ‘standards of ordinary people’.
The courts have elaborated on this meaning in a number of criminal cases. In, R v Salvo  VR 401 the word was generally found to be actions undertaken ‘discreditably, as being at variance with straightforward or honourable dealing’. In a different context, behaviour was considered to be dishonest ‘if it is done in the knowledge that it will produce adverse consequences for others’ (R v Bonollo  VR 633).
In the cases relating to superannuation, there has been little commentary, other than a recognition that offences involving theft or deception for personal gain will almost inevitably be dishonest (refer to N2000867 v Australian Prudential Regulation Authority  AATA 979; AAT Case 60/96 96 ATC 560; VBS v Commissioner of Taxation  AATA 1303; VCA v Australian Prudential Regulation Authority  AATA 580).
Shoplifting would clearly fall within the context of dishonest conduct. Indeed, the explanatory memorandum to the SISA in respect of section 120 includes an example that confirms someone convicted of a minor shoplifting offence some 20 years ago is disqualified.
However, there are obviously a whole range of offences that need to be considered that may fall within the realm of dishonest conduct and, if so, the person would be disqualified. The difficulty in practice is to determine whether some offences fall within the realm of dishonesty without undertaking considerable and in depth legal research; especially as some offences may fall within a grey or uncertain area.
There is a real risk of significant penalties for a disqualified person acting as a trustee of an SMSF. Section 126K of the SISA provides several penalties for a disqualified individual acting as trustee of an SMSF. Individuals who are or become a disqualified person and act as trustee of an SMSF face criminal and civil penalties of two years in prison or a $10,200 penalty. Further, trustees of SMSFs who become a disqualified person must immediately inform the Australian Taxation Office (ATO) or face a penalty of $8,500.
Thus, a detailed investigation should not be deferred or swept under the carpet thinking the risk will simply fade away in time. This is also an offence involving strict liability (ie, no intention to contravene needs to be proved).
Past and overseas offences
In particular, the SISA extends the definition to anyone convicted at any time under a law of the Commonwealth, a state, a territory, or a foreign country. As such, there is potential that no matter where a conviction was recorded, or when it was recorded (including before the SISA came into force in late 1992), the conviction will be relevant to determining whether the person is a disqualified person.
Spent convictions are available under certain state, and federal and overseas legislation that generally prohibit the disclosure of offences in some circumstances. In some cases, a conviction that is more than 10 years old may no longer require disclosure. However, the SISA expressly excludes the law on spent convictions, and accordingly, spent convictions are still relevant for determining whether a person is a disqualified. One tribunal decision involved an overseas equivalent of a spent conviction that was held to be covered by the SISA.
Waiver of status as a disqualified person
The SISA provides limited scope to apply for a waiver of disqualified person status. An application can be made to the ATO or the Federal Court. Different requirements apply to these applications. For example, very strict timeframes are placed on applications to the ATO and the offence can not be one of ‘serious’ dishonest conduct being one that can result in greater than two years imprisonment.
While the ATO may overlook certain minor offences it is unlikely to look favourably on anyone convicted of fraudulent social security/Centrelink, tax and similar claims.
The ability to apply to the Federal Court is less restrained though brings its own considerations as to cost and the likelihood of success.
Steps for advisers
We now consider some practical steps that advisers can take to ensure their clients are not caught out as many do not undertake routine checks on their clients’ background before establishing SMSFs for them.
Advisers should be alert to the above issues for both providing quality service as well as minimising any risk of providing inaccurate or negligent advice. Practical measures may include a ‘best practice’ checklist that compels trustees to consider these issues for each newly established SMSF. Ongoing compliance is also important such as an annual certification that the trustee has not been convicted of dishonest conduct. Advisers should also consider these issues in relation to estate and succession planning: have all proposed, current and future successor trustees, eg, spouse and children, been vetted to ensure they are not disqualified persons?
A police check can be undertaken to overcome a person’s possible oversight of a prior conviction that took place many years ago. Typically, a state and federal police check is required and if the person is from an overseas country with a similar process, an overseas police check could also be undertaken. Auditors particularly may like to obtain such clearances.
Daniel Butler is a director at DBA Lawyers