Court cases highlight key heuristics for SMSF trustee disqualification

The recent decision in Goulopoulos and Commissioner of Taxation [2022] AATA 2540 provides a stark example of the attitude of the courts in this area.

In this case, the nature, seriousness and number of contraventions of an SMSF trustee were held to be sufficient grounds for disqualification of the trustee.

In summary the breaches were (with the relevant section of the SIS Act shown in brackets): 

1. Breach of prescribed operating standards (section 34);

2. Failure of the requirement to lodge annual returns (section 35D); 

3. Breach of sole purpose test (section 62); 

4. Lending to members (section 65); 

5. Contravention for acquisition of certain assets from members (section 66); 

6. Contravention for borrowing (section 67):

7. Breach of in-house asset rules (section 84); and 

8. Requirement that investments are on arm's length basis (section 109).

The court confirmed that the trustee demonstrated 'that he preferred to take actions that suited his own convenience and comfort, rather than doing what he understood was right'. 

Furthermore, while the trustee had expressed some remorse or contrition for what occurred, this appeared to be in relation to the fact of disqualification; as opposed to any acceptance of the wrongfulness of the conduct. 

Given that the court concluded that on the balance of probabilities it was likely that the trustee would deviate from the standards required as a responsible officer, disqualification was appropriate (see Stasos v Tax Agents Board (1990) 21 ATR 974).

This was despite the trustee offering to undertake an education course with an eligible provider, provide an enforceable undertaking to stop the behaviour that led to the contraventions and put in place strategies to prevent contraventions occurring again.  The court concluded that the suggested strategies were not spelt out in detail, and so far as they were, they did not in fact mitigate the risk of future contraventions. 

The conclusions reached in Goulopoulos are given further context by 2 other relatively recent cases explored further below.

Fitzmaurice

First, the decision in Fitzmaurice and Commissioner of Taxation (Taxation) [2019] AATA 2217 which also involved a range of breaches of the legislation, including: 

1. Lending money to a member, breaching the sole purpose test;

2. Early release of benefits where the member did not satisfy the statutory test for financial hardship;

3. Late lodgement and failure to lodge annual returns;

4. Failure to make and maintain investments at arm’s length;

5. Failing to keep an up-to-date market valuation of the major asset of the fund;

6. Record keeping failures.

The court confirmed that on the facts:

(a) the trustee did not have a proper understanding of the role of a trustee and the duties owed by a trustee and a director of a trustee company. 

(b) the fact that there was no suggestion of dishonesty or intention to defraud on the part of the trustee was irrelevant; their incompetence and a lack of acceptance of responsibility was telling.

(c) ultimately, the trustee was held to have an insufficient understanding, insufficient skill and a lack of the required diligence to be a trustee of an SMSF. 

In disqualifying the trustee the court also confirmed the trustee was not a fit and proper person to be a trustee of an SMSF - itself a further ground supporting the disqualification. 

The court also confirmed that unclear verbal advice from the accountant for the SMSF was not something that was appropriate to rely on, partly because the primary responsibility for compliance lies with the trustee of an SMSF, not the advisers to the fund. 

Coronica

Similarly, the decision in Coronica and Commissioner of Taxation (Taxation) [2021] AATA 745 is relevant. 

Again, the factual matrix involved a range of breaches of the Superannuation Industry (Supervision) Act (SIS), including: 

1. Section 66(1): prohibition on a trustee intentionally acquiring an asset from a related party. 

2. Section 83: restrictions on the acquisition of in-house assets if the ratio of in-house assets to total assets exceeds 5%.

3. Entering into transactions not at market value (as defined under section 10). 

4. Contraventions of the accounting record keeping requirements, via the operation of a ‘suspense account’ (section 35A and section 65, which prevent the provision of financial assistance), despite the trustee arguing the approach was supported by Taxation Determination TD 2013/22, ATOID 2012/16, APRA SMSF Regulator’s Bulletin 2018/1 and ATOID 2015/21.

5. Contravention of the sole purpose test (section 62) and the covenants prescribed in section 52 to keep the money and other assets of the SMSF separate from ‘those (assets) that are held by the trustee personally’.

6. Breach of regulations regarding contributions mandated by section 34.

The decision confirmed that in the circumstances it would be inconsistent with the objects of SIS to issue a notice of compliance.  Thus the fund was held to be non-compliant and taxed at the penalty rate of 45%.

Some of the issues that supported this conclusion, in addition to those outlined above, were listed as follows, the seriousness of which were amplified by the trustee being an experienced accountant (of more than 50 years), registered tax practitioner and registered company auditor:

(a) multiple contraventions over an extended period of time;

(b) implementation by an experienced accountant, registered tax agent and registered company auditor, who ought to have known that the arrangements constituted contraventions of SIS;

(c) breaches of the provisions of the trust deed;

(d) lodgement of misleading documents with the Tax Office;

(e) reliance on undocumented valuation of a private investment company that, while not wilful, was grossly negligent if not incompetent; and

(f) the contravention in

(e) above was not corrected within amnesty periods made public by the Tax Office and instead only corrected well after an audit activities had concluded.

Interestingly however, in relation to the Tax Office seeking to have the trustee disqualified, this application was rejected due to the:

1. size of the monetary penalty imposed on the SMSF (due to the decision to make it non-compliant);

2. attempted rectification of the breaches by the trustee;

3. trustee's commitment to keep their and the fund's affairs in compliance since the breaches;

4. willingness to provide appropriate undertakings (such as not acting as the trustee of any other fund and continuing to invest only in listed shares and cash). 

 By Matthew Burgess, director, View Legal