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Self Managed Super Fund (SMSF) Article
How Competent is Your SMSF Trustee

By Tony Negline.

This article may be out of date.

25th July 2007

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There are almost no competency tests for the trustees of Self Managed Super Funds.  The only people not allowed to be trustees include those found guilty of a crime involving dishonesty, undischarged bankrupts and anyone the superannuation regulators have decided aren’t fit to be a trustee.

Crimes involving dishonesty include theft, fraud and embezzlement.  Unlike normal criminal rules which ignore crimes committed after a number of years, the super laws do not allow the slate to be wiped clean.  Dishonesty crimes committed whilst young and foolish continue to haunt the perpetrator.  However a person who is in this position can apply to the tax office to get their crime ignored.

The super regulators do not ban many people from being super fund trustees.  Normally it is people blatantly breaching the super rules who show no desire to understand the rules or amend their bad behaviour.

Recent research by the Australian National Audit Office has found that the tax office struggles to administer this area of the law effectively despite making great effort to do so.

Most people do not fall into the above three categories.  The age, level of interest or mental capacity of trustees of Self Managed Super Funds is never tested or assessed.  This is unlike all other super funds where the competency, knowledge and standing of trustees has to be rigorously assessed by the large fund regulator, the Australian Prudential Regulation Authority.

SMSFs are a very large segment of super assets and also one of the fastest growing segments.  How long will it be before some trustee competency test is introduced?  How would the tax office cope with the paper-work such a test would create?

These issues are for some future time.  At present, the unspoken issue is – how will a fund operate when the trustees are incapable of acting in that capacity?  This can occur for quite a few reasons.

The trustees may have reached an age where their mental capacity has begun to fail and they struggle to make important decisions in relation to the fund.  Everyone’s mind ages at a different rate.  Some people are mentally spent at age 60.  Others are doing well at 90.  Most people begin to find modern life too fast when their body starts to fail at around 85.

It can also occur when a member becomes mentally incapable of looking after themselves.  Perhaps a medical condition or accident has reduced mental capacity.

But this problem can also arise when the main driving force behind a super fund dies and the other trustee might not have the same level of knowledge or interest in running the fund.  There might also be a concern as to what the survivor might do with the super money.

Sometimes grandparents do not want their super fund money left to their children because of their profligacy.  The grandparents might want to leave the super money to their grandchildren.  Assuming the grandchildren are minors, the super laws say that a parent or guardian will be trustee whilst children are minors.  How will the grandparents deal with their wasteful children being trustees for the grandchildren?  Will the grandchildren be dependants under super law and hence able to receive the super money?

Will the survivors enter into inappropriate relationships with people who are good at looking after themselves to the detriment of all others?

At the practical level how are all these issues dealt with?  It will come as no surprise to note that most people do not have any formal plan for dealing with any of these issues.  In some ways it is similar to making a Will.  Research has continually shown that most Australians, even those of considerable wealth, do not have a Will.

If there is no plan then the only way to cope with any of these problems is to muddle through when an issue arises.  Typically these solutions work – or don’t work as the case may be – by accident rather than by design.

For example most people solve the old age issue by using a couple of solutions.  Firstly, they ask their adult children to informally act on their behalf.  This could potentially be formalized by giving a child a Power of Attorney to act as trustee.  Some lawyers believe that it is not possible to use a Power of Attorney for individual trustees when the trustee has full mental capacity but it is okay when a corporation is trustee.  Most children take on the role of their parent’s trustee with a great deal of responsibility and commitment.

An alternative to this approach is that one half of a couple might take out a Power of Attorney that makes the other the trustee for the other.  The ATO issued an Interpretative Decision on this issue – 2003/932 – which said that this issue is okay as long as it is an enduring Power of Attorney.  This solution will be useful to childless couples or those who prefer to remain as independent for as long as possible.

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