Changes of SMSF Trustees & Tax Liability

If an SMSF has individual trustees at the end of a financial year and a company is appointed as replacement trustee before the ATO has issued the income tax assessment notice, will the ATO issue the notice to the individual trustees or the company?

In short, who is liable for the tax assessment – the trustees at year end or the trustees at the time the notice is issued?  Also if there is a refund who is entitled to the refund?

Example

Bill and Mary are the trustees of the BM Super Fund and were the trustees on 30 June 2012.

On 5 July 2012 Bill and Mary retired as trustees and BM Pty Ltd was appointed as the replacement trustee.  Bill and Mary are the directors of BM Pty Ltd.

In February 2013 BM Pty Ltd arranges for the financial statements for the 2011/12 financial year for the fund to be prepared and audited.  The company also arranges for the fund’s annual return to be prepared and submitted to the ATO.

Will the ATO issue the notice of assessment for the fund to Bill and Mary (the trustees at balance date) or will the ATO issue the notice of assessment to BM Pty Ltd (the trustee which signed and lodged the return)?

The ATO will issue the income tax notice of assessment for the 2011/12 financial year to Bill and Mary even though they ceased to be the trustees.  The ATO will seek to recover any debt due under the notice of assessment against Bill and Mary.  Should the notice of assessment result in a tax refund, the tax refund will be paid to Bill and Mary.

In most situations this will not cause a problem for Bill and Mary as the current trustee, BM Pty Ltd, will arrange for the debt due under the notice of assessment to be paid and the ATO will be indifferent as to whether the debt is paid by Bill and Mary or by BM Pty Ltd.

If Bill and Mary paid the tax debt from their personal funds, they have a right of reimbursement against BM Pty Ltd.  Alternatively, they could require BM Pty Ltd to pay the tax by exercising their right of exoneration against BM Pty Ltd.  These rights of reimbursement and exoneration are effectively first charges on the assets of the SMSF.

Where a refund is payable, the ATO will pay the refund to Bill and Mary who would hold the refund as a trust asset which they would have to pay to BM Pty Ltd; essentially Bill and Mary would hold the tax refund on a bare trust for BM Pty Ltd.

What if the change of trustee occurred before balance date?

If Bill and Mary retired as trustees before balance and BM Pty Ltd was trustee on balance then the ATO would issue the notice of assessment against BM Pty Ltd.

What if the replacement trustee did not or refused to pay the tax debt?

The legal position is that the tax debt is owned by Bill and Mary and the ATO could enforce that debt against them.

As the tax debt is a trust expense, Bill and Mary have rights against BM Pty Ltd which they could exercise and force BM Pty Ltd to pay the tax debt or reimburse Bill and Mary if the tax debt has already been paid by them.

To support Bill and Mary’s rights against BM Pty Ltd, they have enforceable rights against the trust assets.