This article discusses a very important topic but many don’t seem to take it seriously.
Many SMSF administrators, auditors and lawyers have told me that they are constantly finding clients, who they have known for many years, suddenly falling foul of the disqualified person rule because the individuals involved simply ignored this problem until it became too late.
In the last several years there have been a number of Administrative Appeals Tribunal (AAT) cases where some disqualified trustees have tried to overturn Tax Office determinations.
This article will look at the disqualified person rule and two AAT cases.
Disqualified persons
Once you’re deemed under the super laws to be a disqualified person, then you can no longer be a SMSF trustee or member. Once you’re disqualified you either have to leave your fund and move your super money to an APRA regulated super fund, or convert the SMSF to a small APRA fund which means the appointment of an APRA approved trustee.
A disqualified person is someone who is an undischarged bankrupt and/or has committed a crime involving dishonesty at any stage in the past and anywhere around the world.
The statute of limitations that often wipes away prior convictions doesn’t apply. This means that any minor crime you committed where a conviction was recorded against your name is caught.
What are dishonest crimes? The definition of these crimes has been amended recently to take into account computer based crimes. Crimes involving dishonesty include theft, embezzlement, fraud, attempted fraud, perjury, using false documents, falsification of documents, forgery, dishonestly manipulating machines (eg Automatic Teller Machines or ATMs), money laundering, potentially unlicensed financial advice, etc.
The ATO can ignore minor crimes that have a custodial sentence of less than two years or small fines. You have to apply for this concession just after a conviction is recorded however the ATO can extend this time period.
The ATO said in the Shaw case discussed below that “a more benign light might be shed on crimes if they occurred a long time ago and the person involved had an unblemished record in the intervening period.”
Stuart Shaw and Commissioner of Taxation
This AAT case was handed down in May 2015.
It shows how a series of unfortunate events can go from bad to worse.
In this particular case, the ATO had refused to ignore some convictions and had then declined to change this initial decision after the trustee had objected. The SMSF trustee’s next step was judicial review before the AAT.
The SMSF in question with husband and wife trustees was created in 2002. About 12 months later the husband was injured in a car accident caused by a negligent driver. In time this caused depression and his building business to close. For a while he worked as a photographer but in June 2008 began working as a contractor at a power station construction site.
He worked long hours for six and sometimes seven days per week. One problem he faced was long-term traffic delays caused by improvements to the road to and from the worksite. He said the long working hours, the difficult travelling conditions and the work environment were collectively highly stressful.
He had been fined and lost driver’s license points for exceeding speed limits on a number of occasions. In order to retain his license he falsely declared for five speeding infringements that his wife and others had been driving his car.
At some stage he was being blackmailed, so he sought the advice of a serving and a former police officer who both suggested he should come clean with the authorities. This led to a trial involving this false swearing and other offences. He initially pleaded not guilty but then changed this plea. It was noted that he had more than 30 speeding offences but no other offences had ever been recorded against his name. He was given a custodial sentence which has been served.
During 2008, the ATO audited the super fund and found a range of super law breaches however these were all fixed by late 2009. These breaches had involved leasing fund property to its member’s relatives, loaning money to the fund’s members and breaching the in house assets test which restricts the value of fund assets that can be used by fund members or their relatives.
In the years following, he also failed to lodge some super fund statutory returns and personal tax returns on time.
For most of the 2013 financial year the Tax Office had told him he had to immediately resign and leave the SMSF which he ultimately did in July 2013.
The Tax Office argued before the AAT that, “an offence of dishonesty or corruption is one that is contrary to the fiduciary standards expected and required of a trustee of a superannuation fund and is a serious offence”.
The Tribunal found that the “threshold required to have a disqualified status is a high one” and because of his past behavior, it said the trustee had failed to show he may contravene the super laws in the future.
Tony Mourched and Commissioner of Taxation
This AAT decision was handed down in 2014.
In March 2010, Tony Mourched was convicted of making a false statement to gain a financial advantage. Before the trial, on the advice of his lawyers, he entered into a plea bargain with the prosecution which would have seen him being treated leniently including no conviction recorded against his name. His conviction therefore came as a surprise.
When convicted, Mourched was a SMSF trustee. He didn’t apply for leniency from the ATO until May 2012. Ordinarily he had until April 2010 to make this application. The Tax Office rejected his application because he hadn’t applied within 14 days and it also rejected his request to allow an extension. He then applied for leniency from the AAT and argued that he was unaware of the super law disqualification rule and his conviction was a complete shock which led to “unimaginable stress”. In addition he and his wife had had serious and on-going medical problems.
Whilst expressing sympathy for his predicament, the AAT rejected Mr Mourched’s application.
What Should You Do About This Rule?
If you think you might be caught by this rule then please speak to your SMSF administrator as soon as possible. In addition speak to an experienced superannuation solicitor.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
