Managing a Self-Managed Superannuation Fund (SMSF) comes with the critical responsibility of ensuring that the fund’s investments are managed separately from personal or business investments of its members. This blog explores the importance of correctly recording ownership, the advantages of corporate trustees, and the necessary steps to protect SMSF assets.
Why Correct Ownership Matters
Properly recording SMSF assets is essential to distinguish them from personal or business assets. This separation is crucial to:
- Comply with superannuation laws.
- Protect the assets in case of personal financial disputes.
- Prevent exposure to personal creditors.
Example:
In a recent scenario highlighted by the ATO, a trustee mistakenly registered shares purchased with SMSF funds under their own name. When faced with personal financial difficulties, the trustee was forced to sell these shares to cover personal debts, leading to significant losses for the SMSF and potential non-compliance penalties.
Corporate Trustee vs. Individual Trustees
The easiest way to comply with the ownership rules is for the SMSF fund to have a company set up solely for the purposes of being the corporate trustee of the fund. A corporate trustee structure simplifies the management and protection of assets. When a corporate trustee is used, the SMSF’s assets are held in the name of the company, “as trustee for” the fund. This not only helps to keep personal and fund assets separate but also provides flexibility in case of changes within the trustee structure.
For instance, if there is a change in directors, there is no need to update the ownership documents for each asset, as the trustee of the fund remains unchanged. This can save time, reduce administrative burdens, and minimise the risk of errors that could jeopardise the fund’s compliance status.
In contrast, an individual trustee structure, while potentially cheaper, requires updating asset ownership documents whenever there is a change in trustees. This process can be time-consuming and costly, especially if the fund holds multiple assets.
Special Considerations for Property and Other Assets
Investing in property within an SMSF can present unique challenges due to state-specific property laws. Key considerations include:
- Property Ownership: Must be correctly recorded in the name of the trustees “as trustees for” the SMSF.
- Failing to do so can lead to significant legal complications, particularly if the property is incorrectly held as joint tenants rather than tenants in common, which is preferred to avoid complications upon the death of a trustee.
- Other Assets: Some assets, like certain shares or life insurance policies, may be difficult or impossible to hold directly in the name of the fund.
- In such cases, fund ownership must be clearly documented using a declaration of trust, caveat, or similar instrument, ensuring that the SMSF’s interest is legally recognised.
Maintaining Compliance and Avoiding Pitfalls
To maintain compliance with the Superannuation Industry (Supervision) Act and avoid potentially severe penalties associated with non-compliance, we recommend the following:
- Document all SMSF assets properly.
- Ensure investments are registered in the correct name from the outset.
- Seek professional advice when needed, especially for complex asset types or when there are changes in trustee arrangements.
- Keep detailed records of all transactions and ownership documents to demonstrate compliance during audits and in the event of any disputes.
In Summary
Properly managing and protecting the assets within an SMSF is a fundamental aspect of a trustee’s duties. By ensuring that all investments are correctly owned and recorded, funds can be protected from potential legal disputes and remain compliant with the law. Whether opting for a corporate trustee structure or carefully managing assets under individual trustees, the priority should always be clear: SMSF assets must remain separate from members’ personal or business assets and used solely for retirement.
For expert guidance, contact the team at Audit Your Superfund.