Roles, responsibilities and duties of trustees
The roles, responsibilities and duties of trustees of discretionary family trusts and self managed superannuation funds – How they differ.
All trusts have the following elements:
- A trustee
- Trust property
- Beneficiaries of the trust.
Trustees legally own the trust property, and are responsible for trust management. They have legal duties imposed on them. They must act in the best interests of the beneficiaries; however their overriding duty is to obey the terms of the trust deed.
Under certain circumstance trustees can be held personally liable for trust debts and transactions.
Trustees of both Family Discretionary Trusts (FDT)s and Self Managed Superannuation Funds (SMSF) s have basic trust law responsibilities including:
- To act honestly in all matters affecting the trust
- To exercise a degree of care, skill and diligence as an ordinary person prudent person
- To act impartially between beneficiaries
- To keep and render proper accounts
- To properly invest the trust funds
- To pay and transfer the trust property and the income thereof to the right persons
- Not to deal with the trust property for his own benefit, or otherwise to profit by the trust
- To keep trust assets separate from non trust assets (including the trustee’s personal assets)
- Not to do anything which would impede the performance and function of the trust
- To allow beneficiaries access to certain information
The duties and responsibilities of trustees of FDTs and SMSFs differ due to the purposes for which the trusts were created and thus the different legal jurisdictions in which they operate.
FDTs in NSW are governed by the Trustee Act 1925 whereas SMSFs are governed by the Commonwealth in the Superannuation Industry Supervision Act 1993 (SIS) legislation Part 6, and the SIS Regulations 1994.
Discretionary Family Trusts
FDTs are created when settlers give money or property (“the settled sum”) to Trustees to hold on behalf of trust beneficiaries.
Trustees of FDTs are appointed by an Appointor named in the deed and are thus indirectly controlled, as the Appointor has the power to appoint and remove trustees.
Discretionary Trust deeds often contain provisions which allow the Trustee to:
- Determine income
- Deal with distributions
- Accumulate income
- Income and capital streaming
- Exercise wide discretionary powers to determine which (if any) beneficiaries are to receive distributions of income and capital.
However, until Trustees exercise such discretions, beneficiaries have no claim on the trust property thus enabling FDTs to be used for wealth preservation and tax flexibility.
Self Managed Superannuation Funds
SMSFs are superannuation funds which by law have less than 5 members and have special legislative standing under SIS. The SMSF trustee receives superannuation contributions from its members for the investment, accumulation and eventual payment of retirement benefits to those members.
SMFSs are regulated by the Australian Taxation Office (ATO). Trustees of SMSFs have responsibilities, in addition to those of a FDT under general trust law, which carry far more onerous and significant penalties for breaches of the rules of the fund under SIS.
The trustee of an SMSF holds the trust assets for the members of the fund for eventual distribution to them as retirement benefits. The only discretionary power held by an SMSF trustee is the payment of benefits on the death of a member. Even then this discretion must be exercised in accordance with SIS and its Regulations.
The requirements of an SMSF trustee are complex in nature and include:
- Each trustee of an SMSF must be a member of the fund (except for single member funds).
- If the fund has a corporate trustee, each director of the corporate trustee must be a member (except for single member funds).
- No trustee or director of a corporate trustee can receive any remuneration in respect of duties or services as trustee of the fund.
- Where a person becomes an SMSF trustee after 1 July 2007, they are required to sign a declaration in an approved form that they understand their duties as an SMSF trustee (or as a director of a corporate trustee). The existing trustees must also ensure the new trustee signs the declaration within 21 days of becoming a trustee and keep it on record for at least 10 years. Trustees are required to notify the ATO of any changes in the registered details of the fund.
- The SIS laws contain a set of minimum standards known as Covenants which trustees must observe and understand. Any breach of the rules could not only cause the trustee to be penalised but also the fund to become non compliant and lose its concessional tax treatment.
- Section 62 of SIS refers to the trustee’s responsibility at all times to observe the Sole Purpose Test. This test requires SMSFs to be maintained for the sole purpose of providing its members with retirement benefits.
- SMSF trustees must formulate and give effect to an investment strategy in accordance with the SIS investment rules which take up some 35 pages of SIS and can be extremely complex in nature.
Whereas a discretionary family trust trustee must at year end prepare financial statements and distribute any surplus to beneficiaries after exercising its discretion, an SMSF trustee has more responsibilities.
Some of these include:
- Ensure contributions have been accepted in accordance with the rules and SIS.
- Regular reviews of the SMSF investment strategy have been carried out during the year.
- Arranging for a compliance and financial audit of the fund.
- Compliance at all times with all SIS investment restrictions.
- Conditions of the release of benefits paid to members have been complied with.
- Where a benefit has been paid, has the trustee withheld the appropriate amount of tax?
- Report any breaches of SIS to the ATO
- Have the trustees reconfirmed they are not disqualified persons?
If a Trustee allows an SMSF to become non complying the ATO can levy penalty of 45% of the total members’ retirement benefits held by the fund.
SMSF trustees are subject to a wide range of penalties which can result in monetary fines, criminal conviction and imprisonment for up to two years for the trustee.
Not only are they subject to civil penalties, SMSF trustees are subject to strict liability regardless of fault and fault liability for reckless or intentional breaches of SIS legislation.
Estate Planning – Perkins and Monahan
Jacob’s Law of Trusts in Australia – Meagher QC and Gummow
Kaplan Financial – Self Managed Superannuation Funds
Trusts – NAB Power Point presentation.
Trusts and Estate Strategy – Michael Perkins.
Equity and Trusts in Australia 4th Edition – Dal Pont and Chambers
Australian Master Superannuation Guide – 2009/2010