The ATO’s most recent quarterly statistical data shows continued growth in both the number of Self Managed Super Funds (SMSFs), and the number of SMSF members. This continuing trend shows the attraction of SMSFs for people who want to be in control of their own superannuation.
But what happens to these SMSF members when they turn 75, 80 or even 85 years of age? Regardless of age, fund trustees must still continue to conduct trustee meetings, monitor their fund’s investment strategy and investment results through differing investment climates, have regular meetings with their fund accountant, financial adviser and possibly actuary, correspond with the regulators and auditors and so on.
The ATO’s statistics show that while a greater number of young members are being attracted to SMSFs, more than 60% of all SMSF members are still over age 55. At some point, older members may not be able to perform their trustee obligations. While many retirees may continue to have the time and desire to run their own fund, the reality is that around 30 per cent of people over age 80 experience some level of cognitive impairment. Such impairment can make running the fund as trustee difficult, or even impossible. If a member of a fund has lost mental capacity, they are no longer eligible to remain a trustee, even if they show a willingness to continue performing the role.
To ensure the viability of the fund, contingency planning must be considered. This allows for a plan to be implemented when the need arises. Forward planning allows actions and decisions to be undertaken while all trustees still have full mental capacity. This month’s Technical Blog considers these important issues.
While the issues are not legally identical, the concepts applied to trustees in this nblog also broadly apply to those who operate as director of a corporate trustee. Particular care needs to be taken, and legal advice sought, when employing option 1.
Implications for an ‘ageing’ SMSF member
Immediately before their retirement is the best time for clients to consider how their retirement income should be managed over the longer term, including what would happen if they were no longer able to fulfil the role of trustee of their SMSF. This helps avoid unnecessary expense and conflict further down the road.
There are a number of strategies that can be implemented when an ageing SMSF member becomes less willing (or is no longer able) to fulfil the role of trustee. These include:
- Continuing to operate the fund with no changes in structure.
- Appointing an enduring power of attorney to take over the member’s role as trustee
- Converting the SMSF into a Small APRA Fund with the appointment of an independent professional trustee.
- Cashing in the member’s benefit and rolling over to a retail fund .
- Introducing new members (subject to the member limit) to help share the burden of trustee duties. It is important to note that this does not negate each person’s responsibility, but may help share the load.
Each of these options has its own benefits and drawbacks. wealthdigital subscribers have access to a full analysis of each of approach.
Be careful who controls the fund
Some of these options may include bringing a child (or children) into the SMSF. This is not an option to be taken lightly and the capability, and responsibility, of any individual that is to be added to a fund as trustee needs to the carefully considered.
A case that ended up before the Administrative Appeals Tribunal highlights to risks inherent in appointing an unfit person as a trustee of an SMSF. In the case, the Triway Super Fund was established in 2002 with three members and trustees – two parents and their son. The son developed a drug addiction and began to withdraw contributions made to the fund for his own uses. One withdrawal in 2002 was retroactively, and fictitiously, labelled a “lost loan”. In 2006 the son was declared bankrupt and thus became a disqualified person, yet was not removed as a trustee.
Ultimately, the ATO declared the fund non-complying, which resulted in a significant tax bill for the fund – a tough blow considering the losses the fund had already experienced due to the unfit trustee’s maladministration. The case highlights why the choice of trustee is not one to be taken lightly.
If an ageing member is no longer able to fulfil the role of trustee, actions can be taken at that time to remedy the situation. However, it always pays to have planned ahead.
All SMSFs can benefit by discussing how the fund should respond if a member becomes unwilling, or unable, to perform a trustee role ahead of the event. Such discussions can be noted in formal trustee meeting minutes to ensure all parties involved have a record of the discussion.
Trusted professionals are also central to determining the best course of action for a SMSF should the need to amend trustee arrangements arise. By engaging the fund’s financial planner, accountant and/or solicitor, full consideration can be given to all potential outcomes and complications.
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The information contained in this publication is based on the understanding knowIT Group Pty Ltd ABN 27755976705 AFSL 333649 has of the relevant Australian legislation as at the date shown in this publication. The information contained in this publication is of a general nature only and is intended for use by financial advisers and other licensed professionals only. It must not be handed to clients for their keeping nor can any copies of sections of this publication be given to clients. knowIT Group is not a registered tax agent under the Tax Agent Services Act 2009. We recommend that your client be referred to their registered tax agent or legal adviser prior to implementing any recommendations that you may make based on the information contained in this publication.