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Disqualified status for SMSF trustees: lessons from a recent AAT decision

Certain events can disqualify a person from being allowed to have an SMSF. One such event is conviction of an offence in respect of dishonest conduct (see s 120(1)(a)(i) of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’)).

However, it can be possible to have a disqualification waived under s 126D of the SISA.

The recent Administrative Appeals Tribunal (‘AAT’) decision of Shaw and Commissioner of Taxation [2015] AATA 288 provides insights into the waiver process.

Disqualified status for SMSF trustees: lessons from a recent AAT decision

The facts of Shaw and Commissioner of Taxation [2015] AATA 288


An SMSF called the S and J Superannuation Fund was established in 2002. The trustees were Mr Stuart Shaw and his wife.

In 2003, Mr Shaw was injured in a car accident. As a result he suffered from depression. Mr Shaw ceased operating his building business in 2007.

Mr Shaw was experiencing 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 Mr Shaw worked long hours and experienced disruption to his family life. He became stressed.

By August 2008 Mr Shaw had accumulated demerit points arising from six speeding offences over the previous two years. If Mr Shaw lost 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 Mr Shaw was detected travelling at an excessive speed. Mr Shaw falsely declared that his wife was driving the vehicle and she accepted the demerit points and fine.

In September 2008, he was again accused of a traffic offence for which he made another false statutory declaration that it was his sister who was driving. The traffic infringement notice was issued to her.

For reasons irrelevant for our purposes, Mr Shaw was then blackmailed into making a full admission of his dishonest conduct to the police.

A specialist report revealed that at the time of the traffic offence Mr Shaw was experiencing significant psychological difficulties which may have impacted on his ability to make rational decisions.

Mr Shaw eventually demonstrated remorse and fully confessed to his crimes and was ordered to serve six months’ imprisonment.

Mr Shaw resigned as trustee of his SMSF effective from 1 May 2013.

The ATO’s decision

By this stage, Mr Shaw had been convicted of an offence in respect of dishonest conduct. This automatically disqualifies him from being a trustee of a superannuation entity.

Mr Shaw sought a waiver of his disqualification on two grounds. Specifically, Mr Shaw had neither been imprisoned for two or more years, nor received a fine of 120 penalty units.

Under 126D of the SISA, the ATO must exercise the power to waive the disqualification if the ATO is satisfied, upon these two grounds, that Mr Shaw is high unlikely to contravene this Act, and do anything that would result in a SMSF contravening this Act (ss 126D(1A)(f) and (g)). More specifically, s 126D(1A) of the SISA provides:

If, having regard to any of the following:

  1. the offence to which the application relates;
  2. the time that has passed since the applicant committed the offence;
  3. the applicant’s age when the applicant committed the offence;
  4. the orders made by the court in relation to the offence;
  5. any other relevant matter;

    the [ATO] is satisfied that the applicant is highly unlikely to:

  6. contravene this Act; and
  7. 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 …

However, the ATO was not satisfied on the basis of paragraphs (f) and (g) of s 126(1A) of the SISA which meant that the ATO was not required to make a declaration waiving Mr Shaw’s disqualification. As a result, the ATO refused to waive Mr Shaw’s disqualification.

Mr Shaw then sought judicial review of the decision in the AAT

Outcome/The AAT’s decision

In reaching their decision, the Tribunal noted that the critical provision were paragraphs (f) and (g) of s 126(1A) of the SISA:

… whether [Mr 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 essence, the AAT upheld the ATO’s reasoning in refusing to grant a waiver and on this basis, the AAT affirmed the ATO’s decision. In other words, Mr 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 Mr Shaw’s position (ie, 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 s 17A(10) of the SISA).

Accordingly the options in this type of situation are to either:

  • Remove Mr Shaw’s benefits from the SMSF (in other words, roll to an APRA fund); or
  • Convert the SMSF to a small APRA by appointing a registrable superannuation entity licensee (ie, 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 (eg, Mr 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!

Critical lesson for practitioners

The AAT’s decision illustrates many important points. However, for our purposes, I want to focus on one point in particular. The AAT cited an earlier decision which stated 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 the applicant might incidentally suffer hardship as a result of the disqualification is therefore irrelevant.

In essence, the parliament intended to create a high threshold whereby a waiver for disqualification would be difficult to obtain.

The critical implication is that those with existing SMSFs — or those who wish to establish SMSFs — must be very vigilant to avoid committing 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 keep the ability to have an SMSF.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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