Legal technicality threatens SMSFs

A legal technicality in the new SLAB3 legislation is threatening Australia’s 300,000+ self-managed superannuation funds (SMSF). The legislation, due to come into effect on 31 March says an employee can only be a member of the company’s SMSF if he or she is related to all director fund members.

It creates some interesting scenarios - for example: a company employee, who is married to one director but has no personal relationship with the other cannot become a member of the company's SMSF, but a spouse who has divorced one director to marry the other can - because he or she then has a relationship with both directors.

The Financial Planning Association (FPA) is calling for urgent changes to the legislation which it fears could make many funds inoperable as SMSFs by the end of March.

Chief Executive of the FPA, Michael McKenna says that if the government does not move quickly to amend the legislation, many companies will be forced to split their SMSF funds.

"Many funds may have to remove their spouse as an employee, split the DIY fund into several funds on a family-only basis or transfer the benefits of the related employee member to another fund." A process which is unlikely to be achieved before 31 March.

ASFA's Head of Research, Michaela Anderson says that the spirit of the legislation is to exclude employees unless those employees happen to be related to one of the directors. "If the words [in the legislation] are doing other than that then we support any change. Members shouldn't have to be related to everyone in the fund."

While the issue is of some concern to the Strategist Group's Grant Abbott, he believes there are many other important issues which follow from the legislation, the most important being the trust deed.

"Advisers now really need to look at existing trust deeds. They can't accept that they'll cope with the new regime as they stand."

And he warns that planners can no longer buck pass the responsibility for the trust deed to the client's accountant or lawyer.

"The legislation says that the financial planner - along with the client's accountant and/or lawyer - is equally responsible to see that the deed suits the purpose of the transactions."

Failure to see that all members become trustees or directors of the corporate trustee renders the trustees - and their advisers - liable to six months' gaol.

"The fact is that if an accountant or a financial planner knowingly allows a new member to come on board without becoming a trustee, he or she is liable for the same penalty as the trustees of the fund - and that is, six months gaol."

Not to mention the effect on the SMSF which becomes non-complying.

"As the fund is then non-complying," says Abbott, "its members stand to lose half of their assets in tax." Something, he says, they may sue their advisers for.

"One of the other big things out of SLAB3 is that the ATO has taken over from APRA as the regulator," he says. "Under the old rules, APRA used to audit funds and check them from a prudential point of view. The ATO is not into prudential regulation, it wants to see compliance with all laws and it has a budget of $29 million to audit funds. It's starting to do target audits now and will be looking into compliance."

Abbott says that under the new rules even one minor breach of the SIS Act makes the fund automatically non-complying. "The sting in the tail for financial planners is that if a client's fund is non-complying and it was the financial planner's fault, the client can ask to join the ATO to file a claim for damages against the financial planner."

Abbott's advice is: "Look at your SMSF clients, review the trust deeds and make sure that all is AOK."