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Darin Tyson-Chan is a journalist with InvestorDaily, a Morningstar publication.

The Australian Taxation Office (ATO) has released an interpretive decision (ID) clarifying what the commissioner takes into account when considering whether or not to exercise his discretion to waive a self-managed superannuation fund (SMSF) trustee's status as being a disqualified person due to serious dishonest conduct.

Under paragraph 126(2)(a) of the Superannuation Industry (Supervision) (SIS) Act, an offence will be deemed to involve serious dishonest conduct if the "penalty actually imposed for the offence is a term of imprisonment of at least two years".

However, this position was tested recently when the tax commissioner was asked to waive an individual's status as a disqualified person in relation to being an SMSF trustee because he had been sentenced to more than two years' imprisonment but was ordered to be released under his own recognisance after providing a specified form of security.

The commissioner decided not to exercise the power to waive the disqualified person status in this case because the sentence satisfied the SIS Act definition of serious dishonest conduct regardless of the conditions the judge determines.

"In this case, the sentencing court considered a term of imprisonment of more than two years to be the appropriate penalty to be imposed for the offence, irrespective of the court's direction that the member be released upon recognisance. Thus the penalty actually imposed for the offence was a term of imprisonment of more than two years," the ATO said in ID 2011/24.

Furthermore, the ATO specified the elements that carried the most weight with those types of decisions.

"The gravity of the offence is the most important factor in determining if an individual is a prudential risk to a superannuation fund. In this context, the phrase 'penalty actually imposed for the offence' for the purposes of paragraph 126B(2)(a) of the SIS Act means the term of imprisonment that the court considers to be appropriate for the offence rather than the actual period of time that the offender spends in prison," the ATO said.