The risks of getting shown the Red Card as an SMSF Trustee
In soccer, a player who is shown a red card is instantly sent off the field, disqualified from playing for the remainder of the match and cannot be replaced. The red card is issued for serious offences, violent conduct, dangerous play, and any action that brings the game into disrepute.
But in the world of SMSF, a red card from the regulator, the ATO, is much more painful and can be a permanent ban on a person ever being able to be the Trustee of their SMSF.
Read in this article
- Becoming (and staying) the Trustee of an SMSF is hard work
- Convicted of a Dishonesty Offence
- Being subject to a Civil Penalty Order
- Being in Bankruptcy
- Not being a Fit and Proper Person
- Consistently failing SMSF audits
- Not having the practical skills or required understanding of Trustee Duties
- What to do if you become a Disqualified Person?
- Sources & Further Reading
- FAQ's
- Is it true that certain events, like bankruptcy, automatically disqualify me from being a trustee for my own SMSF?
- The article mentions convictions for dishonesty. Does this include any criminal offence, or only serious financial crimes?
- So, aside from automatic disqualification, can the Australian Taxation Office (ATO) step in and disqualify me for other reasons?
- What actually happens to our SMSF if my spouse, who is the other member and trustee, gets disqualified? Does the whole fund have to be shut down?
- I was convicted of a minor dishonesty offence many years ago. Can I apply to have my disqualification waived so I can set up an SMSF?
- Sources & Further Reading
Becoming (and staying) the Trustee of an SMSF is hard work
What type of offences get you ‘red carded’ by the ATO?
Under section 126K of the Superannuation Industry (Supervision) Act 1993 (SISA), a person commits an offence if they knowingly act as a trustee, or a director of a corporate trustee, of an SMSF while they are a disqualified person, and are a trustee of an SMSF and does not notify the ATO in writing immediately if they are or have become a disqualified person.
Here's a quick list of the things that can get you disqualified from being the trustee of an SMST or being the director of a company, that's also the corporate trustee of an SMSF.
Convicted of a Dishonesty Offence
Being convicted of an offence including dishonest conduct - regardless of whether in Australia or a foreign country.
An offence involving dishonesty would include a person convicted of a shoplifting offence 20 years ago or a person committing elder abuse and stealing money from a vulnerable older person.
- Being convicted of a dishonesty offence usually results in a disqualification for being an SMSF Trustee, for life.
While in very limited circumstances you may be able to appeal being added to the public List of Disqualified Persons if there are exceptional circumstances, don't expect the cost of these associated legal fees to be paid from the funds of the SMSF.
Being subject to a Civil Penalty Order
Another way a person can become disqualified is if a civil penalty order is made against them by a government department. This is where fines are imposed for civil offences, rather than punishment through the criminal process.
Some of the specific civil penalty provisions relating to SMSFs include:
- Breaching the sole purpose test
- Breaching the borrowing restrictions
- Breaching compliance and in-house asset rules
- Lending to members of an SMSF
- Investing in assets that are not held at arm's length
- Promoting the illegal early release of super money
- Participating in avoidance schemes
- Not notifying the relevant regulator of significant adverse events
Being in Bankruptcy
A person who is currently an Undischarged Bankrupt is also disqualified from being the trustee of an SMSF - whether under Australian or foreign bankruptcy laws.
Not being a Fit and Proper Person
The ATO can also disqualify you from being the trustee of an SMSF if it's satisfied you're not a fit and proper person to be a trustee.
The ATO can have regard to:
- a person's general behaviour,
- public conduct, reputation and character,
- whether they're being sanctioned by a professional or regulatory body,
- their integrity and involvement in any entities that have been wound up (This is where a Directors ID ensure a directors past behaviour now follows them via the tracking Directors ID) and,
- any person who has outstanding tax debts for the ATO or is being involved in a Phoenix company activity, would not look good.
Consistently failing SMSF audits
The ATO can also disqualify a person if the SMSF continues to receive ‘qualified’ annual SMSF audits.
Not having the practical skills or required understanding of Trustee Duties
Reasons for being deemed not a fit and proper person can also be the result of a lack of understanding of what it means to be an SMSF trustee.
These can be from lacking practical administration skills - from not having the relevant skills to be a trustee, not being deemed competent and responsible to be a trustee, and even (hang onto your hats) a person's failure to appropriately answer questions put to them by the ATO in their random trustee phone audits of SMSF trustees.
Pro Tip: Sapience clients who are SMSF Trustees are provided with a list of the questions to expect to be asked by an ATO auditor.
What to do if you become a Disqualified Person?
If you become a disqualified person you need to:
- Remove yourself as Trustee and inform the ATO immediately, and
- Transfer your superannuation interest out of the SMSF
When it comes to working in the SMSF space, SMSF Auditors, SMSF Property Acquisition Agents and SMSF Advisors (and Co-Trustees) should regularly check the ASIC disqualification register.
Being an SMSF Trustee is a professional opportunity, never an entitlement.
Sources & Further Reading
- ATO: Running a self-managed super fund - The Australian Taxation Office's official portal outlining the key responsibilities and duties of an SMSF trustee.
- ATO: Disqualified trustees - The primary ATO resource explaining the circumstances under which a person is automatically disqualified from being an SMSF trustee.
- Superannuation Industry (Supervision) Act 1993 s 121 - The specific section of the legislation that grants the regulator the power to disqualify a trustee.
- ATO: Fit and proper person - Official guidance detailing the criteria the ATO uses to assess whether an individual is a 'fit and proper person' to act as an SMSF trustee.
FAQ's
Your SMSF and Disqualification Risk Questions, Answered. Here’s a quick summary of what you need to know about what can lead to a disqualification from being able to run an SMSF.
Is it true that certain events, like bankruptcy, automatically disqualify me from being a trustee for my own SMSF?
Yes, that’s absolutely correct. The law is very clear on this. Certain events trigger what we call 'automatic disqualification'. The most common one we see is bankruptcy. The moment you are declared bankrupt, you are legally prohibited from continuing as a trustee of an SMSF, or from becoming one. This isn't a grey area; it's a hard and fast rule designed to protect the integrity of the superannuation system.
The article mentions convictions for dishonesty. Does this include any criminal offence, or only serious financial crimes?
That’s an excellent question, as the specifics are important. The disqualification applies specifically to convictions for offences involving 'dishonesty'. While this certainly includes serious financial crimes like fraud, the definition can be quite broad. It's about conduct that demonstrates a character flaw inconsistent with the duties of a trustee. It could be theft, deception, or similar offences. The key takeaway is that if the conviction relates to dishonest conduct, regardless of whether it was related to finance, it will automatically disqualify you.
So, aside from automatic disqualification, can the Australian Taxation Office (ATO) step in and disqualify me for other reasons?
Yes, they can, and this is a critical point. The ATO holds significant power as the regulator of SMSFs. If they determine that you have seriously breached the superannuation laws—for example, by illegally accessing funds early or making prohibited loans—they can declare you a 'disqualified person'. This isn't an automatic process; it's a decision the ATO makes based on its own compliance investigations to protect the fund's assets.
What actually happens to our SMSF if my spouse, who is the other member and trustee, gets disqualified? Does the whole fund have to be shut down?
This is a very practical and common concern. If one trustee in a two-member fund becomes disqualified, you have a serious problem because the fund no longer meets the legal structure of an SMSF. However, you don't necessarily have to shut it down immediately. You have a strict 6-month window to rectify the situation. This usually means either rolling the disqualified person's benefits out to a public APRA-regulated fund or restructuring the SMSF to appoint a licensed corporate trustee. The crucial thing is to act decisively and within that six-month timeframe.
I was convicted of a minor dishonesty offence many years ago. Can I apply to have my disqualification waived so I can set up an SMSF?
Yes, there is a formal process for this. If you are automatically disqualified but believe your circumstances warrant reconsideration—for instance, if the offence was minor, occurred a long time ago, and you've had a clean record since—you can apply directly to the ATO to have the disqualification waived. You would need to present a very strong case demonstrating that you are a fit and proper person to manage an SMSF. The ATO will assess your application based on the nature of the offence, the time elapsed, and your conduct since. It's not guaranteed, but the pathway does exist for those with compelling circumstances.
Sources & Further Reading
- For Automatic Disqualification Criteria: The primary legislation governing these conditions is the Superannuation Industry (Supervision) Act 1993. Section 120 outlines the circumstances under which a person is automatically disqualified, including bankruptcy and convictions for offences involving dishonesty.
Superannuation Industry (Supervision) Act 1993 - SECT 120 - For the ATO's Power to Disqualify: The Australian Taxation Office (ATO) provides detailed information on its role as the regulator, including its power to disqualify trustees who have contravened the law. This guidance explains the process and the reasons the ATO might take this action.
Australian Taxation Office (ATO), "Disqualified trustees" - For the Definition of an SMSF and Trustee Requirements: The fundamental rules about what constitutes a Self-Managed Super Fund, including the requirement for all members to be trustees (or directors of a corporate trustee), are defined in Section 17A of the SIS Act.
Superannuation Industry (Supervision) Act 1993 - SECT 17A - For the 6-Month Rectification Period: The ATO's guidance for SMSFs explicitly states the 6-month period allowed to restructure a fund after a trustee becomes disqualified, reinforcing the need for timely action.
Australian Taxation Office (ATO), "What happens if a trustee is disqualified" section within "Choose individual trustees or a corporate trustee." - For the Process to Waive Disqualification: The ATO outlines the formal process for applying to have a disqualification waived. This includes the application form and the matters the ATO will consider when making its decision, as empowered by Section 126B of the SIS Act.
Australian Taxation Office (ATO), "Application to waive disqualification"
Call us today on 1300 137 403 or email us here for a no-obligation private chat about your situation.
Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn. Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.
