SMSF practitioners have been cautioned that trust deeds failing to include conditional clauses for membership risk leaving their clients with costly legal battles and compliance breaches, an industry lawyer has warned.
Speaking to SMSF Adviser, DBA Lawyers director Daniel Butler said the SIS regulations make it difficult to remove members from an SMSF, because they don’t allow members to be removed unless there is written consent from the member.
“We’ve had quite a few cases where the relationship has fallen apart, and [the trustee] wants to get them out, and it proves very difficult, because there’s no clear legal recourse or process of going about it,” said Mr Butler.
This is often a common occurrence with divorce, he said, with both parties “digging their heels in” and nothing being done.
“The compliance obligations are going into disarray, the ATO is breathing down their neck, the two spouses aren’t seeing eye to eye, and they’re both speaking to their advisers and clocking up big legal and tax bills,” he said.
Mr Butler drew attention to one prominent case which shows the consequences of the inability to remove a member or trustee.
In this case, the fund was created and money was contributed upon advice provided to the trustees by people introduced by the son, said Mr Butler.
“The son had a drug addiction and squandered all of his mum and dad’s SMSF retirement savings. The fund was rendered non-complying,” he said.
“Assuming the parents wanted to remove the son from the [fund], they did not have a clear right to do so as they would have required their son’s consent.”
Mr Butler said that to prevent these types of scenarios, it is important the trust deed includes provisions to “admit members on a conditional basis”.
“The ‘conditional’ member’s consent would operate such that, upon the occurrence of one or more specific trigger events, the SMSF trustee can use the consent to remove the member and pay their benefit, if a relevant condition of release is satisfied, or transfer their benefit to another complying superannuation fund,” said Mr Butler.
“For example, if a member wanted to admit their second spouse as a member but wanted the flexibility of paying or rolling their spouse’s balance in the event of a relationship breakdown, then this event could be specified as one of the conditions on which the second spouse would be removed from the fund.”
A lot of the trust deeds around, Mr Butler added, only provide the power to trustees or members by headcount.
“With the vast bulk of SMSFs having two members, this could easily result in a stalemate.”