Certain events can disqualify a person from being allowed to have a self-managed super fund (SMSF). One such event is conviction of an offence in respect of dishonest conduct (see section 120(1)(a)(i) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA)).
However, it is possible to have a disqualified status waived under section 126D of the SISA. The recent Administrative Appeals Tribunal decision of Shaw and Commissioner of Taxation [2015] AATA 288 provides important insights.
The facts
An SMSF called the S and J Superannuation Fund was established in 2002. The trustees were Stuart Shaw and his wife. In 2003, Shaw was injured in a car accident. As a result, he suffered from depression. Shaw ceased operating his building business in 2007.
Shaw was in financial difficulties and in June 2008 he commenced working as a contractor at the Tamar Valley Power Station in Tasmania. This work required him to drive along the East Tamar Highway each day. The highway was undergoing works, which caused regular lengthy delays.
During this time, Shaw worked long hours, experienced disruption to his family life and became stressed. By August 2008 Shaw had accumulated excessive demerit points, arising from six speeding offences over the previous two years. If Shaw received two or more demerit points during the next 12-month period, his licence would be suspended for a period of six months.
A car driven by Shaw was detected travelling at an excessive speed. Shaw falsely declared that his wife was driving the vehicle, and she accepted the demerit points and fine. In September 2008 he made a similar false statutory declaration, except this time it was in respect of his sister.
Shaw was then blackmailed. He went to the police and made a full admission of his crimes. A specialist report suggested that at the time of the crimes, Shaw was having significant psychological difficulties that may have impacted on his ability to make decisions.
Shaw eventually demonstrated remorse and fully confessed to his crimes. On June 1, 2012, he was ordered to serve six months’ imprisonment. Shaw resigned as trustee of his SMSF, effective from May 1, 2013.
Superannuation law
Naturally, by this stage, Shaw had been convicted of an offence in respect of dishonest conduct and automatically became a disqualified person. Shaw sought a waiver of this disqualified status. Because he had neither been imprisoned for two or more years, nor received a fine of 120 or more penalty units, the Australian Taxation Office (ATO) had the power to waive the disqualified status.
However, the ATO did not – and does not – have to waive the disqualification. More specifically, section 126D of the SISA provides:
“If, having regard to any of the following:
(a) the offence to which the application relates;
(b) the time that has passed since the applicant committed the offence;
(c) the applicant’s age when the applicant committed the offence;
(d) the orders made by the court in relation to the offence;
(e) any other relevant matter;
the [ATO] is satisfied that the applicant is highly unlikely to:
(f) contravene this Act; and
(g) do anything that would result in a self-managed superannuation fund not complying with this Act;
the [ATO] must…make a declaration waiving the applicant’s status as a disqualified person…”
The ATO decided not to waive the disqualification. Shaw then sought a review of that decision in the Administrative Appeals Tribunal. The Tribunal noted that, in the end, it all boiled down to “…whether [Shaw] is highly unlikely to firstly, contravene the Act and secondly, do anything that would result in an SMSF not complying with the Act”.
In addressing this, the Appeals Tribunal illustrated several important points for practitioners.
Critical lesson for practitioners
The decision illustrated many important points. However, I want to focus on one point in particular. The Tribunal cited an earlier decision in which it was noted that the use of the words “highly unlikely” in the subsection confirms that the Parliament intended to place a premium on investor protection. It is not an easy stand to satisfy. The fact that the applicant might incidentally suffer hardship as a result of the disqualification is therefore irrelevant.
Accordingly, it is supposed to be difficult (that is, not easy) to get a disqualified status waived. Therefore, those with SMSFs – or those who might one day want to have SMSFs – must be very vigilant to never commit offences in respect of dishonest conduct. Otherwise, they might find themselves fighting a battle – which the Parliament has purposely designed to be an uphill battle – to maintain the right to have an SMSF.
Outcome
The Tribunal affirmed the ATO’s decision. In other words, Shaw’s disqualified status stood and he was and is prevented from being a member of an SMSF.
Sometimes the question is then raised: can someone in Shaw’s position (that is, disqualified from being a trustee or director of a corporate trustee) still be a member of an SMSF if the holder of an enduring power of attorney acts as trustee/director instead of the disqualified person?
The answer is no. This is due to specific legislation (see section 17A(10) of the SISA).
Accordingly, the key options in this sort of situation are to either:
- Get Shaw’s benefits out of the SMSF (for example, roll to an APRA fund), or
- Convert the SMSF to a small APRA fund by appointing a registrable superannuation entity licensee (that is, an “RSE licensee”) as the trustee.
Naturally, for many in this position, neither is a particularly appealing option.
It is trite to state that people should not commit crimes. However, offences in respect of dishonest conduct, in addition to any principal punishment (for example, Shaw’s six months’ imprisonment), have the extra kicker that the criminal may well lose the ability to have an SMSF.
As the old saying goes: crime doesn’t pay.
