The Australian Taxation Office website contains a great deal of helpful information for SMSF trustees and practitioners, including which records a fund must keep. For example, copies of all SMSF annual returns lodged must be retained for at least five years and changes of trustees must be kept for 10 years.
It is evident from the examples below that documents such as contracts for the purchase of property and changes of trustee records, as well as all deeds of variation and the like, should be kept indefinitely. It is also important that SMSF practitioners stay abreast of all changes made to a client’s fund and ensure all records are well organised and accessible.
So, where can it all go wrong? Here are some real-life examples.
1. Maintaining the chain of deeds
A and B set up the AB Super Fund in 1987. They are the trustees of the fund in their own capacity.
In 1990 and again in 1998, they update the provisions of their SMSF trust deed. Their accountant arranges this for them. A and B sign the new deeds and associated minutes.
In 2002, A and B move to another city. They collect their records from their accountant and engage a local accountant to look after their fund.
That same year, A and B decide to change the trustee of the fund to a corporate trustee – AB Investments Pty Ltd. Their accountant arranges this, but unfortunately A and B fail to hand over the most current trust deed, being the 1998 deed. The change of trustee is effected based on the provisions of the 1990 deed.
In 2013, the trust deed is updated yet again because the fund wants to enter into a limited recourse borrowing arrangement to purchase a property. A and B have in the meantime located some more of the fund's records at home and provide these to their accountant – including the 1998 deed. The 2013 trust deed update is based on the variation provisions contained in the 1998 trust deed and is signed by AB Investments Pty Ltd.
A and B approach their financier in relation to the loan. The financier reviews the chain of deeds and discovers the anomalies within them.
This raises the following questions:
1. A and B purport that AB Investments Pty Ltd is the current trustee of the fund and the current governing provisions of the Fund are contained in the 2013 trust deed.
2. The bank questions whether AB Investments Pty Ltd is actually the current trustee of the fund since it was appointed pursuant to the 1990 deed instead of the 1998 deed.
3. If AB Investments Pty Ltd is not the current trustee, then the 2013 trust deed is also invalid since it was executed by the company.
4. If this is the case, the current governing provisions of the fund are actually the 1998 deed which does not contain the appropriate provisions for the trustees to enter into a limited recourse borrowing arrangement.
The issues are complicated, but eventually the fund's affairs are put back in order. In the meantime, however, the fund has incurred legal and other costs and the property A and B wanted to buy is now sold.
2. Lost deeds
L and M are members of the L & M Super Fund and are the original trustees. In 1993, a newly-incorporated company called LM Holdings Pty Ltd was appointed trustee.
In 1997, the fund purchases a property using existing funds. A title search for the property shows that ‘LM Holdings Pty Ltd’ is the registered owner.
In 2014 L and M divorce and M becomes the sole member of the fund. A new trustee, M Investments Pty Ltd, is appointed. The change of trustee is effected and appropriate forms completed to change the name on the title of the property.
An application is submitted to the Office of State Revenue (OSR) for concessional stamping. OSR requests evidence showing when and how LM Holdings Pty Ltd was appointed trustee, but L and M have destroyed the records that show the company's appointment in 1993. They also destroyed the contract whereby they purchased the property which showed ‘LM Holdings Pty Ltd as trustee for the L & M Super Fund’ as purchaser.
Eventually, other fund records were produced, satisfying OSR that LM Holdings Pty Ltd owned the property as trustee for the L & M Super Fund. However, once again this cost the fund time and money to correct.
L and M were under no obligation to the ATO to keep their change of trustee records since the change occurred more than 20 years ago. However, trustees should keep in mind that other authorities, such as OSR and the titles office, may require copies of documents to be produced from the very beginning of the establishment of the fund.
Examples such as the above will obviously vary in complexity. Most issues can be solved, but they can cost the fund substantial time and money. Problems are usually not identified until certain events occur, such as separation or the buying or selling of property, where time can be of the essence.
SMSF practitioners should ensure trustees are aware that penalties can be imposed by the ATO for non-compliance. The penalties will be commensurate with the severity of the breach and range from education directions and undertakings to fines and the freezing of SMSF assets.
Phillip Brophy, senior commercial lawyer, Matthews Folbigg Lawyers