Doing the right thing isn’t always easy but it is always possible! Ensuring those that have an SMSF take their trustee responsibilities seriously is critical. Don’t allow your moral compass to be swayed by personal or professional gain. Saying no to a client or an opportunity might have short term consequences but it will have long lasting benefits.

Right v Wrong – is it black and white?

Unfortunately what is right by one person is not necessarily right by another. Often, we have to rely on our own moral compass to judge whether our actions are appropriate.  Recent events have got me thinking about this issue yet again. Having previously written about this topic I decided to freshen things up by referencing a recent SMSF case and a (not so) sporting decision. I hope they serve as a guide in defining characteristics that should be eradicated from the SMSF industry and those we should embrace.

Trustee responsibilities – Sole Purpose Test

The first event is one that has received quite a bit of coverage in the SMSF industry. It is the Aussiegolfa case – Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 1525. If you want to read the details of the case click here.

This case intrigued me long before it became public as I discussed it on numerous occasions with the parties involved. For the record, I agree with the ATO’s position, I think the asset is an in-house asset. However, I don’t necessarily agree with the law. The intrigue in this case is that the trustees undertook the action knowing it might end badly, if it’s ended! The fact that the trustees undertook the transaction to test the validity or viability of their actions add, in my opinion, to the integrity of their actions. Albeit that I’m sure many people told them there would be an issue. They were willing to put themselves in the spotlight to obtain a position which would provide a pathway, or a roadblock, for all other SMSF investors. There was no deception, nor an intention to deceive. However, there was an attempt to obtain a current day benefit from an investment of the SMSF.

I’ve previously written about the ability for APRA funds to sponsor events or run construction businesses (that no doubt benefit their members), which only serve to make the matter more confusing.  An SMSF is denied a transactions that on material value is no different whether the user of the investment is related or not. The investment standards determine the transaction is not possible, but maybe it’s the standards that are wrong. The dilemma is should a trustee not enter into a transaction because there is a chance it might not be allowed?

Trustee responsibilities – knowingly breaking the rules

I’ve spent years coaching a variety of sports to children as young as seven, trying to teach them right versus wrong. I’ve spent equally as many years “coaching” adults about their trustee responsibilities when they have an SMSF. It troubles me that members of the Australian cricket team have conspired to operate outside the laws of the game. Let’s reflect on this through SMSF goggles!

Errors of judgement exist, but if the trustee/s of the “Australian Leadership Group SMSF” held a meeting and they resolved to act outside the law, that is indefensible. The mere act of talking about it should have been enough for someone to say “this isn’t right”. Perhaps they did and were overruled, which in the SMSF scheme of things comes back to who is actually undertaking the trustee responsibilities? Is it wise to be in a fund where not all things are equal! Likewise, one trustee covering for another having found out they did the wrong thing, is equally deceitful.

The Trustees failed their most basic obligation, to act honestly in all matters concerning the fund.  The trustee has committed an offence that may be considered dishonest conduct. If the Regulator agrees, then they are a disqualified person and must resign immediately.  Of course they have 14 days to apply for a waiver of their disqualified status.  Knowingly breaking the law to gain a benefit is worse than gaining a benefit that is subsequently interpreted to be in breach of the law. All actions by the trustees require a conscious decision to be made. What are the boundaries between right and wrong?

Trustee responsibilities – objective v subjective

To determine whether a fund transaction satisfies the sole purpose test the ATO will consider the facts. They will take an objective view. Trustees must therefore take an objective view when undertaking decisions, rather than base decisions on opinions and emotions. Such decisions are subjective. For those that take their trustee responsibilities seriously, some legitimate questions should be “have they weighed up the risks?” and “is the transaction commercial and legal?”. Once the risks are weighed up and the decision to proceed occurs then look at the legality. If, as in the case of aussiegolfa, the legality is unclear then you’d better ensure the commerciality is in check. Whilst it’s no consolation, if the unit trust in that case wasn’t ultimately considered an in-house asset, the commercial nature of the lease would have meant “nothing to see here”.

The ATO have shown they take a very reasonable approach to trustees that inadvertently do the wrong thing and those that initiate and maintain dialogue with them. The same can’t be said for deception.

There will always be right and wrong and a significant amount of uncertainty in between. It is often the inability to determine between the two that leads to problems. Or an absolute ability to determine between the two and acting anyway!

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