"Fit and Proper Person": Timely reminder to SMSF trustees about their responsibilities

A recent legal decision of the Administrative Appeals Tribunal to uphold what the Australian Tax Office considers being a fit and proper person when a trustee of a Self-Managed Superannuation Fund (SMSF) is a timely reminder to Super Fund trustees, and trustees in general, as to the importance of their role.

In this particular case, an SMSF trustee was found to be in clear breach of his duties. Numerous breaches of the Superannuation Industry (Supervision) (SIS) Act and SIS Regulations included failure to lodge annual returns within the timeframe, failure to comply with benefit payment standards, and inappropriate investments made by the SMSF at the direction of the trustee.

The number and seriousness of the breaches were justification for the individual to be disqualified to act as a trustee, investment manager or custodian. The second ground for disqualification was the individual was deemed to not be a fit and proper person to be a trustee.

In the decision it was noted “...a trustee of a self-managed superannuation fund who fails to adequately and properly carry out his duties and functions as a trustee due to his lack of skill, competence and knowledge of the relevant legislation, could not be a fit and proper person to be a trustee of such fund. In addition to the skills and judgement required of a person who acts as a trustee of a superannuation fund, the covenants given by trustees in their respective trust deeds state clearly the duties imposed on a trustee if that person is to be regarded as fit and proper to act in that capacity.”

The decision goes on to expand what has been considered as being actions of a fit and proper person.
In 1955, the High Court stated:
"The expression “fit and proper person” is of course familiar enough as traditional words when used with reference to offices and perhaps vocations. But their very purpose is to give the widest scope for judgement and indeed for rejection. “Fit” (or “idoneus”) with respect to an office is said to involve three things - honesty, knowledge and ability: “honesty to execute it truly, without malice affection or partiality; knowledge to know what he ought duly to do; and ability as well in estate as in body, that he may intend and execute his office, when need is, diligently, and not for impotency or poverty neglect it”.
And in 1990:
"The expression “fit and proper person”, standing alone, carries no precise meaning. It takes its meaning from its context, from the activities in which the person is or will be engaged and the ends to be served by those activities. The concept of “fit and proper” cannot be entirely divorced from the conduct of the person who is or will be engaging in those activities...in certain contexts, character (because it provides indication of likely future conduct) or reputation (because it provides indication of public perception as to likely future conduct) may be sufficient to ground a finding that a person is not fit and proper to undertake the activities in question.”

When taking on the role, trustees must "know, understand and meet" all obligations as set out by the ATO and ensure they are not violated, or potentially face disqualification.

Once disqualified, the trustee must cease being in that role or face prosecution, potentially leading to significant fines or imprisonment. The new trustees then have six months to restructure the SMSF so that it continues to meet the definition of an SMSF, or wind it up and roll all members over to a complying super fund.

While this was an extreme case and the decision specifically deals with the application of a fit and proper person as it relates to a Trustee of an SMSF, the definition and applies to any Trustee in a similar role.
The full details from the Tribunal case can be viewed here.
If you have any questions about your role and obligations as a Trustee, please contact your local Moore Stephens office.