The Key to Owning SMSF Assets

While it might appear straightforward, attention to detail is the key to owning SMSF assets. And with r4.09A SISR now one of the most reported breaches to the ATO, understanding how clear title works is fundamental for SMSF compliance.

Requirements of r4.09A SISR

Regulation 4.09A SISR ensures that the fund's assets are kept separately from the members' personal or business assets.

ATO ID 2014/7 clarifies that the principles of r4.09A SISR apply to all types of assets, including shares, units in a trust and other property

Part of that requirement is to protect fund assets by establishing clear ownership in the event of a dispute to avoid costly litigation.

SMSF assets cannot be held in the personal name of the member or trustee, regardless of whether the trustee is an individual or a director of a corporate trustee.

Alternatively, the audit report may be qualified and an auditor contravention report (“ACR”) lodged with the ATO.

Correct Title to Assets

As an SMSF is a unit trust, it cannot hold fund assets directly. The purpose of the trustee is to hold the assets legally on behalf of the beneficiaries, who are the beneficial owners.

The naming convention for SMSF assets is as follows:

Corporate Trustee: ABC Pty Ltd ATF ABC Superannuation Fund

Individual Trustee:

John White & Jane White ATF ABC Superannuation Fund

From an administrative point of view, it is much easier to have a corporate trustee. The reason is that the appointment or resignation of a director of the corporate trustee does not require any changes made to the title.

Sole Purpose Corporate Trustee

An asset held in the name of the corporate trustee only and not held on trust for the fund may comply with r4.09A.

Typically, fund assets are expected to be held in the name of the corporate trustee as trustee for the fund.

A corporate trustee can be a sole-purpose corporate trustee which, apart from attracting a much lower ASIC fee, means it cannot be used for other purposes.

The alternative is setting up the corporate trustee for multiple purposes, such as acting as the corporate trustee for the SMSF and a trading entity.

Where the assets are held in the name of the sole-purpose corporate trustee only, the fund has sole ownership of the assets in case of a creditor dispute because there is nowhere else for the assets to go.

Suppose the corporate trustee is multi-purpose, and the assets are held in the name of the corporate trustee only. In that case, the fund may miss out because there can be confusion about which entity owns the assets. ?

The company's constitution is one way of proving that the corporate trustee is a sole-purpose corporate trustee.

Individual Trustee Changes

On the other hand, any changes to individual trustees require an amendment to the trustee names on every investment owned by the fund.

It is incredibly time-consuming and can come with fees such as those imposed by share registries. Depending on how the trust deed has been set out, the deed may also have to be amended to change the trustee.

Note, too, that while Australian Trust Law does not require each individual trustee's name to be listed as the legal owner of an asset, the ATO does.

However, the ATO recognises that some databases have limitations to recording all trustees. Under these circumstances, the ATO recommends that the fund documents all individual trustees' names as owners of the investments.

Appointment of Trustee

The appointment of any new trustee, regardless of the SMSF trustee structure, requires the new trustee to consent in writing to the appointment under s118 SIS.

The standard accepted method is typically a signed trustee consent form.

The trustee must also sign the ATO Trustee Declaration Form required under ?s104A SIS. The declaration must be signed within 21 days of:

1. becoming a trustee or director
2. undertaking an ATO-approved education course to comply with an education direction
3. the appointment of a legal personal representative as a trustee or director on behalf of a member

Uncertain Legal Entitlement

Some assets may not be able to be held in the name of the SMSF due to an unavoidable restriction, such as state or territory law.

In real terms, very few reasons explain why the title is incorrect.

The ATO says that where assets cannot be held in the fund's name, ownership must be clearly established by "executing a caveat, or creating an instrument or declaration of trust to enable the fund to assert its ownership".

When a trustee has made a simple mistake by not putting the trustee as the legal owner, trying to paper over a crack can sometimes trigger other issues. ?

Declaration of Trust Issues

One of the keys to owning SMSF assets is understanding that a declaration of trust is only effective before an asset is purchased, not afterwards.

Where the asset is property, for example, a declaration of trust signed after the purchase can trigger double stamp duty.

An acknowledgement of trust is preferred once an asset is purchased, which may be queried by an SMSF auditor to find out why the fund does not have correct title. ?

Related Party Bare Trust

Using a related-party bare trust to address problems with asset ownership can result in further compliance contraventions.

The carve-out in s71.8 and s71.9 SIS says that an asset held under a bare trust is not an in-house asset if a limited recourse borrowing agreement (LRBA) is in place that meets all the requirements under s67A SIS.

Unfortunately, where no LRBA exists, there is a breach of s71, and the investment becomes an in-house asset of the fund.

The situation perfectly sums up where trying to resolve a potential compliance breach only creates a worse one.

Unique SMSF Bank Account

ATO ID 2014/7 has determined that an SMSF must open and maintain its own bank account to comply with the requirement to keep assets and money separate from other entities.

By way of example, an SMSF sets up one bank account that it shares with a related unit trust for administrative simplicity and cost savings. The ATO considers that the trustees have not kept in line with the requirements of r4.09A SISR and failed to ensure that the operating standards were complied with at all times.

Conclusion

Ensuring that an SMSF has clear title to fund assets is becoming a minefield as the number of r4.09A SISR contraventions increases.

It is only a matter of time before r4.09A SISR, previously considered a less risky breach, moves into the ATO's higher risk bracket to stem the flow.

Further guidance from the ATO will assist SMSF professionals in understanding r4.09A SISR and the key to owning SMSF assets.?

Shelley Banton is Head of Education at?ASF Audits. She writes a monthly?SMSF news article,?has a podcast?called?"The SMSF Experts"?and is regularly invited to speak at peak industry SMSF conferences.