SMSF update from the ATO

In a recent speech, Alison Lendon, Deputy Commissioner Superannuation, spoke to a number of issues that affect super funds and their trustees and advisers. The following are excerpts:

Applying to the ATO for advice

If trustees of superannuation funds want a written explanation of the ATO’s view on how the super laws apply to their SMSF, they can apply for ‘SMSF specific advice’.

While this advice isn’t legally binding, it will provide certainty to trustees about the application of the super laws to their fund, and the fact that trustees acted in accordance with the advice would be an important factor in their favour. We can assist with this application process.

The most common topics the ATO is asked about for specific advice are:

  • confirming when a property meets the requirements to be ‘business real property’, and working through the acquisition of business real property from related parties;
  • understanding the limitations of investing in related unit trusts;
  • what’s an ‘improvement’ or a ‘repair’ to property acquired under a limited recourse borrowing arrangement (LRBA);
  • the acquisition of assets from related parties and low-interest loans for LRBAs; and
  • requests about collectable and personal use assets since specific requirements regarding their storage and usage were introduced in 2011, especially regarding insurance and gold bullion.

Related party transfers

From 1 July 2013, new legislation will broaden the types of assets currently prohibited from being acquired from a related party, but will also provide more transparent exceptions whereby acquisitions will be permissible.

By way of example, the acquisition of ‘business real property’ will be prohibited unless acquired at market value as determined by a qualified independent valuer. Similarly, listed securities acquired from a related party will also be prohibited unless they are acquired in a way that is prescribed under the regulations. The legislation will also introduce a prohibition on the disposal of SMSF assets to a related party, unless similar exceptions are satisfied.

Director’s Duties

No matter the size of your company, if you are a director of a company, you have a number of duties and responsibilities to both the company and the public. These duties are primarily imposed by the Corporations Act 2001 (Commonwealth). In addition to their duties under the Corporations Act, directors have a number of other duties set out in various other legislation as well as the common law.

It is important to understand and comply with these duties. The failure to comply with these duties may result in directors being personally responsible for any loss caused by the breach of these duties, or even criminal prosecution by the Australian Securities and Investment Commission (ASIC).

The most significant duties of directors are:

To act in the best interest of the company

A director must act in the best interests of a company and to its shareholders as a whole, ahead of their own personal interest. This can get confusing especially in a situation where the directors and the shareholders are one and the same – a common scenario in small businesses. It is important to remember that the company is considered a separate legal entity, has its own interests, and these interests may not be the same as the director’s interests.

To act with care and diligence

A director must perform their duties with the same care and diligence that a reasonable person would have should they be in the director’s shoes.

To act in good faith

A director must perform their duties in good faith, and dishonestly or fraudulently.

To use their position as a director for the proper purposes

A director has an enviable position that allows them to control the company’s business. It is important that they do not abuse this position to act in their own interest, or the interest of someone else. In addition to this, a director would commonly come into information as a result of his or her position. A director cannot use this information to act in their own interest or the interest of someone else.

To avoid conflicts of interest

Directors also have a duty to avoid any actual or potential conflict between their interests and the interests of the company. This arises from the duty of a director to act in the best interests of the company.

To prevent the company from continuing trade if it is insolvent

A director has a duty to prevent the company from incurring additional debt if there is a reasonable suspicion that the company cannot pay its debts when it falls due. This duty is not exercised for the benefit of the shareholders, rather it is exercised for the benefit of the creditors.

Other duties and responsibilities

There are numerous other laws affecting trade practices, taxation, environmental protection, and occupational health and safety that apply to companies. A breach of those other laws may give rise to a director being held liable for the breach.

Summary

If you are a director of a company, it is important to be aware of the core responsibilities and duties that have been imposed upon you by the law. While your primary duty is towards the company, you also have duties towards the shareholders, creditors, and the public. The failure to comply with these duties may result in directors being held personally liable for breaches of these duties. If you are unclear about the duties you should comply with or you are unsure of where you stand, you should seek legal advice as soon as possible.