Three tips when changing SMSF trustees

Many decisions about the structure of a self-managed superannuation fund are made when the fund is first set up – including who will be the “trustee” of the fund.

But things change and one change that is sometimes made in the world of SMSFs is the trustee. (A superannuation fund is technically a trust. All trusts have either a company or a group of individual people who are in charge of how the trust is run – the trustee/s.)

Perhaps the fund has a group of individual trustees and the members want to change to a company? Or perhaps a new member has joined the fund and needs to be added to the individual trustees (where it’s a group of individuals) or as a director of the company.

This can be relatively simple as it largely involves paperwork. It doesn’t require assets to be sold or moved to a new super fund but it does create some traps.

Whenever the Australian Tax Office (as the regulator in charge of SMSFs) is told that a new person has become the trustee of a super fund, it carries out a “risk assessment process”. What this really means is that it runs a few checks to find out if this new person should be managing an SMSF. It looks for things like:

• Does the person (or other entities such as private companies, trusts etc) have a history of insolvency?
• Has he or she been convicted of crimes involving dishonesty?
• Does he or she have a poor history when it comes to things the ATO cares a lot about such as lodging tax returns? Or are they associated with a business that has this problem?

This is a good thing. The ATO is trying to make sure it can metaphorically look the community in the eye and say: “Yes, we can trust the people who are running their own super fund to do the right thing.”

But the downside is that sometimes this process takes time. Where there are enough red flags, the ATO has even been known to call the new trustee and interview them about their new role as trustee of an SMSF.

Beware the change in status

But unfortunately, while all this is happening, the fund is given a special status on an important system known as Super Fund Lookup which is “regulation details withheld”. Only when the ATO’s review is complete will the fund’s status return to “complying”.

This is important because other super funds, employers and payroll providers use Super Fund Lookup to work out whether they can put superannuation money into the SMSF. “Regulation details withheld” is a warning sign to them that they should hold on to the money – they should only transfer to a “complying” superannuation fund.

So the first tip when changing the trustee of an SMSF is to remember that this process may take time. Don’t rely on getting rollovers from other funds into the SMSF quickly if these will happen at the same time as changing the trustee.

A second tip is to remember that the SMSF is actually still a complying fund – it’s just that the usual method of providing independent verification of that fact to external parties such as employers, clearing houses and other superannuation funds is in limbo. That means that someone who wants to contribute their own money to their SMSF (and doesn’t need to prove that it still meets all the rules to someone else) can still do so.

Separately, remember that while the fund is in limbo, other normal activities may be problematic. For example, many banks require SMSFs to open a new bank account when they change from individual trustees to a company. Once told that the trustee has changed, the bank won’t allow transactions on the existing account until the new account is opened.

The third tip is to think about the timing before diving into notifying the ATO, the bank and any other investment managers. Depending on the financial institution, it may be appropriate to tell the fund’s investment bodies about the change of trustee (and activate any new accounts) before letting the ATO know. Or alternatively, tell the ATO first and allow the risk assessment process to play out before telling the fund’s financial institutions.

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.

Perhaps the most important thing is to understand the process – follow these simple tips to achieve a change in trustee without the hassle.

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