Shelley Banton, head of education for ASF Audits, said the Australian Taxation Office (ATO) had disqualified a record number of SMSF trustees in the past 12 months for not being a fit and proper person, and advisers should be aware of the five main reasons for this occurring.
“The ATO has certainly ramped up action against trustees,” she said in a recent webinar.
“There’s been a 300 per cent increase in the number of SMSF trustees disqualified in the 2023 financial year compared to 2022.”
This year, the ATO has issued 753 disqualification notices to SMSF trustees. Ms Banton said the rate of disqualifications is expected to continue at this pace in 2024, with the ATO increasing its compliance activity after a number of funds didn’t meet their obligations in 2023.
“The most common reason for disqualification was illegal early release, which is members accessing their super before they meet a condition of release,” she said.
“The ATO is showing its teeth when it comes to members helping themselves to the SMSF cookie jar, and even more importantly, it’s not afraid to use them to ensure trustees are held accountable and responsible.”
Under the Superannuation Industry Act (SIS Act), there are five reasons an individual can be disqualified, Ms Banton said.
“The first one is that they were convicted of an offence in respect to dishonest conduct,” she continued.
“This includes obtaining a financial advantage by deception, which could be dealing dishonestly with the ATO. It could be something like receiving stolen property or theft.”
Additionally, dishonest conduct can encompass the trustee acting dishonestly so that it causes a loss, for example, with Centrelink fraud.
The second situation in which disqualification can occur is where a civil penalty order is made in relation to that person.
“These are typically monetary fines, which, in the extreme, could actually include an unpaid parking fine,” Ms Banton said.
“This is an area in which advisers need to take care.”
If the person is insolvent under administration, they will also be disqualified.
Disqualification can also occur where the person is an undischarged bankrupt under the Bankruptcy Act, which includes a person who has executed a personal insolvency agreement under part 10 of the Bankruptcy Act.
“This obviously means they’re insolvent under administration, but we need to be aware that it doesn’t apply to any other part of the act because the other parts don’t apply to undischarged bankrupt,” Ms Banton said.
“For example, the trustee could have a part nine debt agreement under the Bankruptcy Act, which means they’re not a disqualified person.”
If the person becomes bankrupt, they must inform the ATO in writing immediately. A tax agent can also inform the regulator.
“There is no ‘get-out-of-jail-free’ card from disqualification of being bankrupt,” Ms Banton added.
Ms Banton said that if a trustee has concerns about their status as an undischarged bankrupt, they should contact the ATO through its online portal or by lodging a hard copy form.
“It’s important to remember that undischarged bankruptcy also catches individuals who are declared undischarged bankrupt under foreign bankruptcy laws,” she said.
A trustee can also be disqualified by the commissioner under section 126A of the SIS Act.
“All of these means advisers have to sift very carefully through the issues that have been faced by the trustees because, depending on the circumstances, it may actually not lead to the trustee being disqualified,” she said.
“The trustee can appeal to the ATO to have a disqualification waived, but it has to be done in writing within 14 days of the conviction.”
Wow, you really think that a trustee of a SMSF would be disqualified for obtaining a benefit by deception when the ATO were totally useless in prosecuting such an offence for partners in large consulting firms?