angry soccer referee blowing whistle and showing a red card

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

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.

author pic drew browneDrew 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.

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