Dealing with skeletons in your clients’ SMSFs

What to do?

After asking a few key questions, I established the following information:

• The trustee(s) passed away two years ago
• The SMSF had an individual trustee structure
• No alternative trustee structures had been implemented
• The deceased trustees and members did have surviving family but they were all overseas
• The previous auditor had issued an unqualified audit report

With these few facts, I soon realised that the compliance implications could be complex and far reaching, and that further information would be required including:

• A brief history of the fund, so far as it is known and who was involved in the fund set-up?
• In the absence of a deed, are there any other minutes or establishment documentation?
• Are there any documents that have been lodged with authorities?
• What are the most recent financial statements, tax returns and prior audit reports?
• Death certificates, wills, death benefit nominations
• Details of executors, legal personal representatives and beneficiaries?
• What, if any, records do the executors hold, or can they obtain them?
• What legal firm was involved in the estate work?
• Bank account details and other investments, so far as they are known?
• Who has authority to operate the bank accounts?
• Have the assets been accessed, by whom and when?
• Any insurance documents?
• Were the deceased involved with a business, as current or former employees may have details or records?
• Is there a previous accountant who may have details?
• Was there a financial planner who was previously involved who may have records?

What are the potential compliance implications?

Any SMSF professional worth their salt knows an SMSF is a type of trust. For a trust to exist there must be a corresponding executed deed. The deed is like the backbone of an SMSF. It sets out the governing rules and without it the whole structure of the SMSF falls over or is non-existent.

Occasionally, there are genuine reasons why a deed may be absent. For example, the trustees may have lost it in floods, fire or even moving house. Perhaps a jilted spouse decided to throw it out with other belongings. I do not hold myself out as a legal adviser but I understand the deed can be re-instated with a properly drafted statutory declaration with the advice of a qualified SMSF legal adviser.

Extreme caution must be exercised in these circumstances. Taking the wrong steps here runs the risk of resettling the fund.

In the case above where there is no executed deed, no living trustees or members and no identifiable legal personal representatives, proving the existence of the fund will be exponentially more complicated.

Even on a very simple analysis, there is a potential breach of the definition of a SMSF – per SIS action 17A:

• Are all members of the fund trustees of the fund?
• Are all trustees members of the fund?

Failure to satisfy this basic requirement could render the SMSF non-complying. This, in turn, may result in the loss of its concessional tax treatment. There is also the question of when the fund became non-complying. This could have real implications for concessionally treated contributions or any pensions paid (just to mention a couple of issues).

Assuming both trustees did not die at the same time, clearly there was a period when only one individual was trustee. It seems no action was undertaken at that point. So often it seems SMSF trustees don’t understand their obligations. This is another good reason for having a corporate trustee.

I began to consider the risks involved and what repair work might be needed. I realised the processes involved in fixing the fund crossed into legal issues, so in this scenario the specialised knowledge of a lawyer was required.

The difficulty with SMSF work is that often the border isn’t clear, so extreme care must be taken.

The overall message for SMSF professionals, auditors in particular, from this example is to ensure they ask accounting firms plenty of questions. Auditors should be asking, “What are you holding in the bottom of the cupboard and have not told me about?”

Firms providing accounting or administration to SMSFs should be asking clients, “Do you or other family members have any investments in superannuation which you have not disclosed to me?”

SMSF practitioners should contact an experienced and ethical SMSF auditor, and potentially also a solicitor, for assistance in putting together all the necessary information in these types of scenarios.

Stay in the loop

Accountants and SMSF advisers should ensure they are across all circumstances and actions taken by their SMSF clients. They may go into certain investment forums and set up a fund in connection with acquiring a real estate investment, maybe interstate or overseas. Or they may execute minutes and other permanent documentation and not comprehend the need to give copies of documents to their accountant. Sometimes there can be a disconnect between the family and the business accountant. What information is contained in your permanent file?

It is important to explain to clients the need for you to have the total picture of their assets and to get copies of documents. I feel the wider you can spread the documents, the better.

It is so amazing that some SMSFs contain many millions of dollars and are not properly documented, and yet the family car is carefully serviced, registered and insured.

As an auditor, I am surprised how often there is no signed trust deed. If I asked an accountant or an SMSF adviser whether they have all the properly executed minutes, deeds and other permanent documents, I wonder if they could respond with a resounding ‘yes’.

David Saul, managing director, Saul SMSF