Being an individual trustee of a self-managed superannuation fund could be more than you bargained for

Individual versus corporate trustee – one of the common questions for SMSF trustees.

Many opt for individual trustees for their SMSF, but is there potential for a real sting in the tail?

Being an individual trustee makes you responsible for the actions of your fellow trustee, and liable for any resulting tax, even if those actions were done without your knowledge.

Recently the Administrative Appeals Tribunal affirmed the decision by the ATO to declare a SMSF non-complying after one of the trustees misappropriated funds without the knowledge of the other trustee and then absconded. This resulted in the remaining trustee being liable for a very significant tax bill with few remaining resources in the Fund.

Shail Superannuation Fund and Commissioner of Tax [2011] AATA 940 involved a SMSF with a former husband and wife as individual trustees and members.

The husband removed $3,460,000 from the Fund’s bank account without the wife’s knowledge. The couple divorced and the husband disappeared overseas.

At the time of the withdrawals neither member was entitled to draw any benefits from the Fund.

The ATO declared the Fund non-complying, with the result being tax payable by the Fund of $1,583,873.68, with additional penalties of $1,475,322.50. There was no dispute that the wife had no knowledge of, and did not consent, to the actions of the husband.

The wife argued that the Fund should not be made non-complying because of the significant tax consequence for her. The AAT found that, although it was not difficult to feel some sympathy for the position in which the wife found herself, the tax assessment and penalties should be upheld for policy reasons.

The situation would not have been so dire for the wife if a company had been trustee. As an individual trustee, the wife was personally responsible for the Fund’s tax liability, even though it arose from events with which she had no knowledge or involvement. This is not the case if the trustee is a company.

This is not an isolated incident, as similar issues arose in Triway Superannuation Fund and Commissioner of Taxation [2011] AATA 302 where a trustee and member (a drug addict son) withdrew almost all the money in the Fund. Again the AAT (while expressing sympathy for the other trustees’ plight) upheld the notice of non-compliance, with the effect the other trustees remained liable for the tax with no resources in the Fund to pay it.

When these risks are considered the cost of having a corporate trustee represents money well spent.

We will discuss this issue in more detail at our Superannuation Update on 23 February 2012. Click here to register to attend.