SMSF Trustee disqualified after transferring money as part of 'emergency fund'

The recent case before the Administrative Appeals Tribunal (AAT) Fitzmaurice and FCT [2019] AATA 2217 involved a director of the SMSF’s trustee who transferred the SMSF’s funds into a personal account in order to finance repairs to accommodation cabins situated on a parcel of land owned by the SMSF. The parcel of land was leased by the SMSF to a related family trust which owned the cabins constructed on the land and which were regarded as the tenant’s improvements under the lease.

The director argued that the withdrawal of funds was required as part of an ‘emergency fund’ given that the property was destroyed in a fire and needed urgent repairs. The AAT rejected the argument and upheld the ATO’s decision to disqualify the director and held that the withdrawal of money from the SMSF were ‘loans’ from the SMSF to the members of the SMSF in breach of various obligations under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).

Facts

The applicant and her husband were the directors of Alisar Pty Ltd which acts as trustee of the Alisar Superannuation Fund (SMSF). The SMSF owned a parcel of land at Dundee Beach in the Northern Territory.

In 2011 the SMSF leased out the land to Alisar Pty Ltd in its capacity as the trustee of the Canada Trust, a related family trust (Canada Trust). No formal lease documentation was entered until 2013 but there was evidence of rent being paid before formalising the lease. Once a lease was prepared, the terms of the lease:

• permitted the Canada Trust to carry on the business of short-term accommodation;
• permitted the installation of short-term accommodation cabins by the Canada Trust for the purpose of short-term rentals;
• stated that any improvements to the premises belonged to the Canada Trust;
• required the Canada Trust to hold insurance policies for all plant and equipment, stock, furnishings and public liability; and
• specified the annual rental as $5,160 per annum payable annually in advance and adjusted in accordance with the CPI.

The Canada Trust was an entity related to the SMSF and was the applicant’s family trust.

In 2012, a storm caused significant damage to the cabins on the land and therefore repairs were arranged by the SMSF’s directors. In order to finance the cost of repairs the applicant made a series of transfers totalling approximately $8,000 from the SMSF’s account into her personal account. The transfers were made to cover expenses which included the following:

• the maintenance of the parcel of land owned by the SMSF following the storm;
• building a permanent structure on the land which was not part of the cabins;
• to pay construction workers for materials and labour carried out on the land and to the cabins including construction of a canopy between cabins; and
• the purchase of a car for the applicant’s daughter because she was working rurally.

There was evidence that the Canada Trust received an insurance payout for $8,300 as reimbursement for the works carried out. The Canada Trust then paid this amount to the SMSF.

Among the advice the applicant said she received regarding the above transactions was that her accountant advised that access to the SMSF’s funds by her as a member would be permitted under the hardship release condition.

Breaches

The AAT found that by taking the above actions and failing to act in relation to other matters, the applicant committed multiple breaches of the SIS Act while acting as a director of the trustee. The breaches included:

• lending to a member of a regulated super fund[1];
• breaching the sole purpose test by maintaining the fund for a purpose other than provision of retirement benefits to members[2];
• breaching the rules relating to the prohibition on the early release of superannuation benefits;[3] and
• failing to:
  • lodge annual returns;[4]
  • make and maintain investments on an arm’s length basis;[5]
  • value assets at market value;[6] and
  • maintain adequate and accurate records.[7]

Decision

The AAT found that it was:

‘of concern that the applicant in response to the disasters saw fit to utilize the money in the superannuation fund for her and her family’s convenience. This suggests that the applicant has no understanding of the purpose for which the superannuation fund was maintained.’

The AAT was not satisfied that the applicant had a sufficient understanding or sufficient skill and diligence to be a trustee of a SMSF and found that the nature, seriousness and number of contraventions provided sufficient grounds to disqualify the applicant under section 126A(2) of the SIS Act from acting as a responsible officer of an SMSF.

The applicant argued that the payments were bona fide expenses incurred by the SMSF with respect to the fund’s assets. The AAT noted that the cabins damaged in the storm were classified as a tenant’s improvement under the lease and therefore were owned and insured by the Canada Trust under the lease terms. Accordingly, the AAT concluded that the terms of the lease together with the fact that insurance for the damaged cabins was paid to the Canada Trust suggested that the cabins were not an asset of the SMSF. These facts taken together with the fact that the withdrawals were made in September 2012 but the works were carried out between April – June 2012, allowed the AAT to conclude that the payments were loans and not bona fide expenses incurred by the SMSF with respect to the fund’s assets as argued by the applicant.

The applicant’s argument that the SMSF has not breached the SIS Act were not assisted by the fact  that the applicant’s accountant recorded the withdrawals from the fund as ‘member loans’: when taken with the fact that repayments were later made by the Canada Trust, the AAT was satisfied that the amounts deducted from the SMSF’s account were loans made to the Canada Trust in advance of the insurance payout. Once the Canada Trust received the insurance payout the loans were repaid. The AAT was not convinced by arguments that there were no loan documents nor the fact that the applicant did not regard them as loans.

Learnings for SMSF participants

The transfer of money issues arose in this case primarily because the SMSF’s trustee and the tenants were related parties. If they were not related parties, then the issue would ordinarily be resolved under the terms of the lease through the tenant’s insurance claim and the SMSF’s trustee as landlord would not have contributed funds towards the works.

If a condition of release has not yet been satisfied by a member, SMSF trustees should ensure they obtain professional advice before taking any action to deduct money from a SMSF.

Further, trustees need to be aware of the rules and obligations which must be followed when carrying out the role of trustee of an SMSF. Acting as a trustee is not a simple exercise and failure to do so could ultimately result in a trustee’s disqualification.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of matters.

[1] s 65 SIS Act.

[2] s 62 SIS Act.

[3] r 6.01(5) Superannuation Industry (Supervision) Regulations 1994 (SIS Regs).

[4] s 35D(1) SIS Act.

[5] s 109 SIS Act. This breach was occasioned by the failure of the Canada Trust to pay rent to the SMSF under the lease.

[6] s 34(1) SIS Act and r 8.02B SIS Regs.

[7] S 35AE, 35B and 35C SIS Act.