Single Member SMSFs – a litigation time bomb for accountants, auditors, planners and AFSLs

Grant's Blog

1. Introduction

The following table taken from the December 2021 ATO statistics show the disaster on our horizon, one I have seen many accountants and planners fall into, even the best and brightest SMSF advisers.

What do you think it is?

Table 4: Proportion of funds by number of members (%)

Source: ATO Statistics December 2021

At the Succession, Asset Protection and Estate Planning Advisers Association (www.sapepaa.org.au) we are always surprised that succession planning in SMSFs is as rare as a Tasmanian Tiger. After all, with six member SMSFs how can it be that 23.7% of SMSFs, roughly 140,000 funds, have one member?

And how dangerous is that to the wealth in the Fund and more importantly the exposure to the auditor, accountant, or fund administrator.

Let’s consider legally what can happen on the death of the single member in a SMSF?

• Section 17A(2) of SISA provides that a single member SMSF is required to have either a corporate trustee where the single member is the director or if not a corporate trustee, another person alongside the single member trustee1.
• Assuming the majority of single member SMSFs have a corporate trustee what happens when the single director dies?
  • If the adviser has not set in place a Successor Director solution, enabling the Executor of the deceased member’s estate to become a Director in place of the deceased member director – as per section 17A(3)(a) of SISA, the corporate trustee has no director and with no director there is no trustee.
  • With no trustee the fund potentially breaches section 19 of SISA and may lose its regulated superannuation fund status.
  • If the fund is not a regulated superannuation fund, then section 42A of SISA would render it a non-complying superannuation fund2.

The solution is to have in place a mechanism that automates the process – the three step Successor Director solution now available at LightYear Docs. The first step is to ensure the SMSF trustee company constitution enables the successor director (being the Executor of the deceased member’s estate) to be automatically appointed as a successor director. If not then the LightYear Docs Successor Director solution enables the constitution to be upgraded easily. The next is to have in place a binding resolution that provides the process for the successor director to be installed on the death of the sole member. The final step is to have a Deed of Indemnity, indemnifying the successor director, where the SIS Act 94 allows.

3.    Not home yet, the Shares are a massive problem

Most lawyers, accountants and administrators neglect the single member SMSF succession by assuming that the shares, usually held by the deceased find their way to the Executor who can then appoint themselves as sole director. Now if you are a SAPEPAA adviser, you have learned all the ins and outs of what happens to trustee company shares in an estate and why they are diabolical. For those that have not been through the SAPEPAA adviser accreditation course, here is a quick briefing.

First off, the shares will be vested in the Executor of the estate if there is a Will. One of the first issues for the Executor is to receive legal advice on, is when can they, under the various State Succession Acts, deal with those shares? With Family Provisions claims able to be lodged from 6 months to 18 months from the death of the sole member, the Executor takes a huge personal risk in dealing with those shares in the interim.

So, while waiting for the expiration of a family provisions claim period, what is the status of a SMSF with no trustee or director and if it goes non-complying who will pay?

To give you a real-life example, at Abbott and Mourly Lawyers we were involved in a family provisions claim, representing the spouse of her late husband who died with a family discretionary trust and SMSF where he was the only director of both corporate trustees and the shareholder. The original lawyer's advice at the outset was don’t worry the shares will pass to the estate and the Executor, who was not the spouse, but a long-time business friend who would become the director of the corporate trustee.

Well, the case went on for three years as the counsel representing one of the deceased’s children made a family provision claim on the estate and threatened the Executor with a whole list of wrongs, charges and civil actions if they sought to do anything with the companies without the express approval of their client. It got so bad that the bank, who had a mortgage on a property in the discretionary trust started recovery action against the trustee for failure to repay the loan.

Do you want to take that chance when there is a simple solution?

4.    Accountants, Auditors and Planners Litigation Exposure?

Section 54C of SISA provides that no person, including an accountant, fund auditor, lawyer, planner or AFSL can breach any of the governing rules of the Fund, which includes legislation, the deed and also ancillary compliance documents such as pension establishments. Clearly if the single member dies and there is no successor director, being the executor, automatically appointed, then the Fund is in real trouble. Section 55(3) enables the beneficiaries and the estate to recover against any person who breached the governing rules. This is where the professionals get dragged in. Look at how accountant Stanley Holloway was sued by the Regulator personally for a breach of SISA – see Australian Prudential Regulation Authority v Holloway [2000] FCA 579, thereby enabling his clients to sure him for loss or damages under section 215 of SISA.

5.    The Solution

Contact Talitha from LightYear Docs, talitha@lightyeardocs.com.au for the Successor Director solution pack, at no charge which provides:

1. Email for you to send out to your clients on the importance of having a Successor Director for their SMSF. And this should also apply to two member funds in case something happens to both members!
2. A video I have done training you on how to do the Successor Director solution quickly and easily.

6.    Revenue Potential

The recommended fee for the Successor Director solution is $650 which includes the upgraded constitution, the binding Director’s resolution and the Deed of Indemnity. Some of our accountants charge up to $950 depending on the size of the fund. Plus it is also available as an automatic no cost inclusion when you establish a special purpose SMSF corporate trustee with LightYear Docs.

Let’s do the numbers on a firm with 200 SMSFs and who establish 20 per annum, applying to all one and two member funds and with a 50% take up rate on existing funds and 100% on new funds:

1. 100 SMSF Successor Director solution – existing funds = $65,000
2. 20 new SMSF establishments = $13,000

Total new revenue = $78,000!

Plus, you get the problem off your firm’s shoulders and don’t believe it can’t happen to you. One of our accountants lost two trustee clients year end, both single director corporate trustees of a discretionary trust, which is even worse!

The three-step solution is available on LightYear Docs for $229 or for accountants you can contact Ben – ben@lightyeardocs.com.au for our subscription offers where you can do as many as you want for a very low price and our special Xerocon offer, available this week.

Plus, for those looking to enhance their career and practise and move into the $6 trillion succession, asset protection and estate planning advice industry, take the first step by completing the LightYear Training Group SAPEPAA adviser accreditation course. Contact Ben and Talitha for special offers.

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1. Why anyone would be a co- trustee of a Fund and not be a member is beyond credulity. With the potential fines for individual trustees, no ability to be indemnified and caught out at death, any SMSF adviser letting this happen is exposed for loss or damages incurred by the no-member trustee.
2. Whether you are using a SMSF Will (my preference) or a BDBN, it is not effective unless there is an option for what will happen in the event the fund is a non-complying fund in the year of the death of the member or while the SMSF is being administered post the death of the member. It should not be an option but a mandatory requirement!

Please be advised this is general information only, and is not to be taken as legal advice. If you would like more information, or have a legal query, please contact Abbott & Mourly directly.
Reviewed: 18/01/2024