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:
- Becoming a trustee or director.
- Undertaking an ATO-approved education course to comply with an education direction.
- The appointment of a legal personal representative as a trustee or director on behalf of a member.c
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.
The first part of our series focuses on the compliance requirements of r4.09A SISR and putting the correct SMSF trustee structure in place. Read The key to owning SMSF assets (part 1).
