Owning assets within a Self-Managed Superannuation Fund (SMSF) may seem straightforward, but the devil lies in the details.
In light of Regulation 4.09A (r4.09A) of the Superannuation Industry (Supervision) Regulations (SISR) becoming one of the most reported breaches to the Australian Taxation Office (ATO), comprehending the intricacies of clear asset ownership is essential for SMSF compliance.
In this article, we will break down the essentials of r4.09A SISR and unravel the key to achieving SMSF asset ownership while maintaining compliance.
Understanding r4.09A SISR
Regulation 4.09A SISR mandates that SMSF assets must remain distinct from the personal or business assets of its members. This regulation applies across all asset types, including shares, trust units, and other properties. Compliance with r4.09A serves the purpose of safeguarding fund assets and ensuring a clear and unambiguous ownership structure, thus preventing costly legal disputes.
It’s important to note that SMSF assets cannot be registered in the name of an individual member or trustee, irrespective of whether the trustee is an individual or a director of a corporate trustee.
Achieving the correct title to assets
Since an SMSF operates as a unit trust, it is incapable of directly holding its assets. Instead, the trustee is responsible for legally holding these assets on behalf of the beneficiaries, who are the actual owners.
The naming convention for SMSF assets typically follows these formats:
- Corporate Trustee: ABC Pty Ltd ATF ABC Superannuation Fund
- Individual Trustee: John White & Jane White ATF ABC Superannuation Fund
From an administrative perspective, having a corporate trustee in place simplifies matters significantly. This is primarily because changes in the directorship of the corporate trustee do not necessitate alterations to the asset title.
Sole-purpose corporate trustee
An asset registered solely in the name of the corporate trustee (without any reference to the fund) can still align with r4.09A compliance requirements. Ordinarily, fund assets should be registered in the name of the corporate trustee as trustee for the fund.
A “sole-purpose corporate trustee” is a corporate trustee solely dedicated to serving as the SMSF trustee, offering the added benefit of reduced ASIC fees and the assurance that it won’t be engaged in other activities. By holding assets exclusively in the name of the sole-purpose corporate trustee, the fund maintains clear ownership in the event of creditor disputes, leaving no ambiguity.
However, if the corporate trustee serves multiple purposes, like acting as the SMSF trustee and a business entity, the waters can become muddy, potentially leading to confusion over asset ownership. In such cases, the company’s constitution can be instrumental in proving the corporate trustee’s sole-purpose status.
Changes in individual trustees
Conversely, alterations to individual trustees can be an arduous process. Each modification requires updating the trustee names for every investment owned by the fund. This undertaking is not only time-consuming but can also entail fees, especially from share registries. Depending on the trust deed’s specifics, it might necessitate amendments to the deed itself to reflect trustee changes.
While Australian Trust Law doesn’t mandate listing each trustee’s name as the legal owner of an asset, the ATO insists on this practice. In scenarios where databases have limitations in recording all trustees, the ATO recommends documenting the names of all individual trustees as owners of the investments.
Appointment of trustees
Whenever a new trustee is appointed, regardless of the SMSF trustee structure, written consent is a prerequisite under section 118 of the Superannuation Industry (Supervision) Act (SIS). Typically, this consent is obtained through a signed trustee consent form. Additionally, the trustee must sign the ATO Trustee Declaration Form, mandated by section 104A of SIS. This declaration must be completed within 21 days of:
- Becoming a trustee or director.
- Undertaking an ATO-approved education course as per an education direction.
- The appointment of a legal personal representative as a trustee or director on behalf of a member.
Overcoming legal title uncertainty
In some cases, certain assets cannot be registered in the SMSF’s name due to legal restrictions, such as state or territory laws. However, these situations are rare and should be thoroughly examined.
The ATO suggests that when assets cannot be registered in the fund’s name, ownership should be unambiguously established through means such as executing a caveat, creating an instrument, or declaring a trust to assert the fund’s ownership. Attempting to rectify a title mistake after the fact can lead to complications and potentially incur double stamp duty, particularly in the case of property.
Related-party bare trust
Utilising a related-party bare trust to address asset ownership issues can create further compliance challenges. The carve-out in sections 71.8 and 71.9 of SIS specifies that an asset held under a bare trust is not considered an in-house asset if a limited recourse borrowing agreement (LRBA) adheres to the requirements outlined in section 67A of SIS.
However, when no LRBA exists, it results in a breach of section 71, classifying the investment as an in-house asset of the fund. Attempting to rectify compliance breaches in this manner can exacerbate the problem.
The importance of a unique SMSF bank account
According to ATO ID 2014/7, an SMSF must maintain its distinct bank account to uphold the requirement of keeping assets and funds separate from other entities. Combining an SMSF’s bank account with that of a related unit trust, for instance, may be done for administrative simplicity and cost savings. However, the ATO views this as non-compliance with r4.09A SISR, potentially leading to consequences.
Securing clear title to SMSF assets is progressively challenging, given the increasing scrutiny surrounding r4.09A SISR violations. It’s only a matter of time before r4.09A SISR breaches, once considered relatively low-risk, gain prominence in the ATO’s high-risk category. To navigate this complex landscape, it is wise to seek advice from SMSF professionals for effective SMSF asset ownership.
About our adviser: Michael Fox is our Managing Director at KMT Partners. He has been dedicated to the success of his clients, devising comprehensive wealth strategies for both personal and business growth for over 30 years. With extensive expertise in business governance and family business succession, Michael specialises in empowering emerging businesses and family enterprises by fostering renewal, enhancing value and smooth transitions to the next generation. Please do not hesitate to reach out if you need assistance.
Reference: The key to owning SMSF assets
This is general advice only and does not take into account your financial circumstances, needs and objectives. The article should not be relied upon as specific information or advice without obtaining appropriate professional advice after a detailed examination of your particular situation from a qualified KMT adviser.