From August 2012 a failure by the trustee of a self-managed superannuation fund (SMSF) to keep its assets separate from assets held by the trustee personally or from those of a standard-employer sponsor (and their associates) is an offence punishable by a fine of up to $17,000.
This requirement has always been a covenant included in SMSF trust deeds by section 52(2)(d) of the Superannuation Industry (Supervision) Act 1993 although the ATO has had no power to enforce it.
The implications of this amendment have largely gone unnoticed as the new regulation 4.09A was introduced at the same time as the new market valuation rules. We expect the ATO to be much more active in this area and it is likely to become another element the ATO raises with SMSFs in the future.
Do you need a sole purpose trustee company?
It may still be possible to comply with the requirements where you have individual trustees or a corporate trustee with other assets or activities.
However, from our experience the ownership records for SMSF assets are often not adequate to easily prove ownership and therefore clearly satisfy this requirement. When this is combined with incorrect bank records or poor record keeping, it can be very difficult to prove the SMSF’s ownership of assets.
Therefore, any SMSF that does not have a sole purpose company acting as trustee is at a high risk of breaching this operating standard. At Cooper Grace Ward, we strongly recommend that our clients have a sole purpose company acting as trustee of a SMSF.
Having a sole purpose trustee company also provides additional benefits, such as:
- easier and cheaper succession where a new member is added or an existing member leaves or dies (as you do not need to have legal documents prepared to change the trustee or change the ownership of assets)
- better protection for trustees from liabilities of the fund
- better asset protection, as you do not need to prove ownership to creditors of other entities in a bankruptcy or liquation.
What other steps should you take to ensure compliance?
It is essential that:
- the SMSF has its own bank account opened in the name of the SMSF trustee and referring to the SMSF
- all income from SMSF assets is banked into the SMSF bank account (without exceptions)
- all assets are recorded in the SMSF trustee’s name, preferably with a reference to the SMSF
- any transactions with related entities are properly documented and undertaken in accordance with the documents
- any land owned in Queensland discloses the SMSF ownership on title.
Where you do not have a sole purpose trustee company, a number of issues can arise. For example:
- Some financial institutions will only open the account in the trustee name. This can therefore cause a problem where you have a trustee with their own bank account for other activities.
- You need to prove the ownership of land. This can be a problem in states other than Queensland as it is not possible or practical to disclose SMSF ownership on the title. In this case, it is important that all other ownership records disclose the trust. For example, the contract, rates and accounts for essential services should disclose the trust where possible.
- It is not possible to record the SMSF’s ownership of shares on the ASIC register. Therefore, the supporting documents for any shares held by the SMSF should record the SMSF interest. Also, the ASIC register should record that the trustee does not beneficially own the shares.