Changing the trustee of an SMSF? Traps to watch for.

10 Dec 2020

Lyn Formica

Head of SMSF Technical & Education Services

Many would know that the ATO follows a risk assessment process when notified of the establishment of a new SMSF. But did you know the same applies when the ATO is notified about changes of trustee? 

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Just like the process for new funds, sometimes the change of trustee is dealt with seamlessly and the fund’s details are immediately updated on the Australian Business Register (ABR) with no problems. However, there are times when the process is delayed. This will usually be because the ATO is undertaking their risk assessment. 

What are the ATO looking for? Just like with new funds, they are seeking to protect the integrity the super system by reviewing if the new trustees/directors (and other entities they are associated with):

  • have a history of insolvency,
  • have been convicted of crimes involving dishonesty,
  • are the trustee/director of the corporate trustee of another SMSF (or have been in the past), or
  • have a poor personal or related party tax lodgment history etc

Even funds who change from individual trustees with the same individuals as directors of the new corporate trustee are caught in this process. Similarly, funds with corporate trustees (where there is no change in the trustee itself) who add new directors should expect the new director to be reviewed.

Whilst this review is being undertaken, the fund’s status on Super Fund Lookup (SFLU) will show as “Regulation details withheld”. Until the ATO’s review is complete and the fund’s status returns to “Complying”:

  • members will be unable to rollover monies into the SMSF,
  • employers will be unable to contribute to the fund using SuperStream (ie using a clearing house), and
  • the fund will be unable to open a new bank account (many banks require a new account to be opened when a fund changes trustee and some won’t allow transactions on the existing account until the new account is opened).

This risk assessment process can take up to 56 days leaving many funds in a difficult position.

Fortunately there are a couple of simple steps that can be taken which may minimize the angst:

  • Depending of the financial institution, it may be appropriate to ensure the fund’s investment bodies are notified of the change of trustee (and any new accounts activated) before notifying the ATO of the change of trustee. Or alternatively, notify the ATO of the change of trustee first and allow the risk assessment process to play out before notifying the fund’s financial institutions of the change.
  • For funds receiving regular contributions from employers, it may be possible to “time” notifying the ATO of the change of trustee for immediately after a monthly/quarterly contribution payment. 
  • Worst case, it may be necessary to have employer contributions paid to another fund for a short time to ensure that the member still receives the money “somewhere” even if they have to roll it over to their SMSF later. However watch out for traps here. For example, if the intention was to split those contributions to the member’s spouse, the split must occur in the receiving fund before the rollover occurs. Similarly, if the member is also making non-concessional contributions by payroll deduction and was intending to claim a personal tax deduction for some or all of these, the deduction paperwork must be completed before the rollover.

However, it will be important to ensure changes in an SMSF’s members, trustees, or the directors of a corporate trustee are still notified to the ATO within 28 days of the change.

Remember that the fund is actually still a complying fund, it’s just that the usual methods of providing independent verification of that fact to external parties like employers, clearing houses and other superannuation funds is in limbo. A client wishing to make a large non-concessional contribution to their fund from their own bank account could happily still do so.

We understand risk assessing changes of trustee is not a new process for the ATO. However, it has recently become more noticeable as a result of the significant backlogs in the ATO’s systems. It is important to ensure clients are aware of the process and the potential implications.

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