Are you and/or your spouse individual trustees for your Self-Managed Super Fund (SMSF), family trust or unit trust? Being an individual trustee leaves you liable for the actions of any fellow trustee and for any resulting tax implications even if those actions are taken without your knowledge.
A 2012 case before the Administrative Appeals Tribunal in Shail Superannuation Fund and Commissioner of Tax declared a SMSF noncompliant after one of the trustees misappropriated funds without the knowledge of the other trustee and then vanished overseas. The case involved a former husband and wife as individual trustees and members of the SMSF. The husband removed $3.46million from the Fund’s bank account without the knowledge of his wife before the couple divorced and he disappeared overseas. The actions of the one trustee resulted in the ATO declaring the fund noncompliant resulting in tax payable of $1,583,873.68 with additional penalties of $1,475,322.50. Although there was no dispute that the wife had no knowledge of the actions of her fellow trustee, and the AAT felt sympathy for the significant taxation consequences faced by the wife, the tax assessment and penalties were upheld as enforceable against the innocent wife (as joint trustee) for policy reasons.
The situation would not have been so dramatic had there been a company as trustee for the SMSF (acting only as trustee) for the SMSF and owning no other assets in its own right. The law in Australia applicable to all trusts (including family trusts or unit trusts) is not entirely clear as to whether a trustee’s “personal” funds can be accessed in certain situations (e.g. where the assets of the trust are insufficient).
It is our strong advice that our clients consider corporate trustees for all of their trusts, with the company acting in only this capacity as trustee for one trust. The money spent in setting up a corporation as trustee is well spent in protecting trustees against possible personal liability and cross risks. A corporate trustee can be set up relatively simply and cost effectively without stamp duty and taxation repercussions. For further advice based on your personal situation please contact our office.