By William Fettes ([email protected]), Senior Associate, DBA Lawyers
The trustee–member rules are one of the most fundamental concepts underlying the operation of self managed superannuation funds (‘SMSF’). These rules are found in s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) and form part of the key conditions that must be satisfied for a fund to meet the definition of an SMSF.
The trustee–member rules set out the ‘rules of the game’ for the structure of a fund, and in broad terms, the rules require that all members are trustees (or directors of a corporate trustee) and vice versa. It is critical that a fund conforms with s 17A, including the trustee–member rules, in order to maintain complying status and receive concessional tax treatment.
Of course, there are particular exceptions and subtleties that apply to the operation of these rules and we aim to clarify some of the major misconceptions in this article.
(All section references are to the SISA.)
Funds with more than one member
Among other things, s 17A(1) provides that funds other than sole member funds will be an SMSF if and only if:
- if the fund has a corporate trustee — each director of the corporate trustee is a member of the fund and each member is a director; or
- if the fund has individual trustees — each member is a trustee and each trustee is a member.
Accordingly, in the ordinary course SMSFs with more than one member would generally be expected to have a perfect correspondence (ie, symmetry) between trustees/directors and members, unless a relevant exception applies.
Sole member funds
In contrast, the rules operate slightly differently for sole member funds and relevantly s 17A(2) provides that a fund will be an SMSF if and only if:
- if the fund has a corporate trustee with a sole director — the sole director is a member; or
- if the fund has a corporate trustee with two directors — one of directors is the member; or
- if the fund has individual trustees — there are two individual trustees, one of whom is the member.
This means that the expectation of perfect alignment between fund members and trustees/directors does not apply for sole member funds. More specifically, a single member fund can have an individual co-trustee (or co-director of a corporate trustee) who is not themselves a fund member. Indeed, two individual trustees are required for the former structure as a single member fund cannot have a sole individual trustee.
Naturally, the trustee–member rules contain a number of exceptions whereby the structure of a fund can deviate from the above composition rules and nonetheless remain an SMSF. We now consider certain relevant exceptions below.
What happens when a member dies?
One of the most often encountered yet misunderstood scenarios is what happens to the composition of an SMSF when a member dies. As a general rule, the trusteeship/directorship of a deceased person ceases on death, whereas their membership status is contingent on the SMSF deed and the extent to which they retain benefits in the fund.
This potentially leaves the fund in an uncertain position, eg, in relation to who can make decisions in regard to the payment of relevant member’s death benefits.
In these scenarios, the trustee–member rules permit a legal personal representative (‘LPR’) to represent the deceased member as a trustee/director from the point in time of the death of the member to when the death benefits become payable. In this context, a member’s LPR refers to the executor(s) of their will or otherwise their administrator(s) in the case of intestacy.
Importantly, LPRs must be validly appointed as trustees/directors to take advantage of this exception in s 17A(3)(a) as this appointment is not automatic (refer to Ioppolo & Hesford v Conti  WASC 389 ).
Naturally, the SMSF governing rules and/or the constitution and structure of the trustee company generally determine how such appointments can be made.
What happens when a member has a legal disability?
There is a separate exception in s 17A(3)(b)(i) for SMSF members under a legal disability. This provision allows for LPRs (in this context, guardians appointed by a state or territory tribunal) to represent the relevant member at the trustee-level.
It should be noted that the definition of an LPR in s 10 imprecisely refers to these types of LPRs as ‘the trustee of the estate of a person under a legal disability’, however, it is broadly accepted by the ATO that a guardian duly appointed under state or territory guardianship law is an LPR for this purpose (see ATO ID 2010/139).
What happens when an enduring power of attorney is in place?
Where a member has appointed an attorney under an enduring power of attorney (‘EPoA’), the attorney can also act in place of a member at the trustee-level under s 17A(3)(b)(ii).
This allows a member to effectively cease being a trustee/director where an attorney under an EPoA has been duly appointed as a trustee/director.
Attorneys as LPRs provide an important safeguard for protecting the interests of members who may lose legal capacity. EPoAs also play an important role in the context SMSF residency where members intend to be based overseas for a period of time, eg, to ensure that the high-level decision-making for the fund continues to be exercised in Australia.
In SMSFR 2010/2, the ATO outlines its view on the operation of this exception. In broad terms, the ATO consider that a member must generally cease as a trustee/director to take advantage of this provision, except for in the case of a corporate trustee where the LPR is appointed as an alternate director.
DBA Lawyers does not recommend the use of alternate directors in an SMSF context, as alternate directors can give rise to ambiguity about who is empowered to act at any given point in time. In our view, appointing a successor director provides a safer means to cover risk in relation to loss of capacity and death.
What happens when a member is underage?
In broad terms, a minor cannot be an individual trustee of a trust or a director of a company (ie, due to them being under a legal disability because of age).
However, this does not mean that minors cannot be SMSF members. Section 17A(3)(c) expressly provides that an underage member who does not otherwise have an LPR can be represented at the trustee-level by their parent or guardian allowing for the trustee–member rules to be satisfied.
Naturally, this exception ceases when the underage member attains age 18. At that point in time, the member would need to be made a trustee/director as soon as possible — ie, within 6 months of the member turning 18.
As evidenced by this article, there are numerous subtleties and complexities that arise in relation to the operation of the trustee–member rules. It is critical that advisers and SMSF members give careful consideration to these rules to ensure that the complying status of their funds is preserved.
This article provides a general summary only and does not consider all relevant aspects of s 17A and broader superannuation law. Expert legal advice should be sought in regard to the trustee–member rules to ensure that any complexities that arise are not overlooked, particularly in the event of a member’s death or loss of capacity or if there is any doubt about the current fund structure.
In part two of this series, we will examine a number of tips and traps in regard to the trustee–member rules and provide a detailed summary of considerations that should be borne in mind when operating 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.