Ownership of SMSF Assets

SMSF trustees have always been under a duty to adequately identify and keep separate fund assets from other assets such as personal assets of the trustee or assets of any sponsoring employer.  

Previously, this requirement was expressed as a “statutory covenant”.  Consequently, if a trustee breached the requirement and the breach resulted in members suffering a financial detriment, the members could take legal action against the offending trustee.  However, as the trustees and the members are one and the same, the members had little incentive to take the trustees to task; they would be suing themselves.  Further, as a statutory covenant between the trustees and the members, the ATO had no standing to enforce the requirement.

Now, the SIS Regulations have been amended so that the duty to adequately identify and keep separate the fund assets is a prescribed operating standard.  As such the ATO can now enforce the requirement and seek to have monetary penalties imposed on the trustees.

In order to satisfy this prescribed asset an SMSF Trustee must ensure that:

•    title records show (so far as possible) that the asset is held by the trustee as a fund asset;
•    primary documents which evidence the fund’s acquisition of the asset are retained; and
•    secondary evidence of the fund’s ownership exists – entries in investment registers, and audited financial statements).

The problem is not that every type of investment an SMSF can make has a formal title recording system and if there is a formal title recording system, then it may only record legal ownership and not ownership as trustee or ownership as trustee of an identified trust (or SMSF).

For shares, units in unit trusts, interests in managed investment schemes, bank deposits, insurance policies – it is usually possible for the title records to show that ownership by the formula “The Trustee of the XYX Super Fund” or “A B Pty Ltd as trustee for the XYZ Super Fund”.

For real estate it is only possible (subject to one exception) to record legal ownership.  For example, the title register will record “AB Pty Ltd” as the registered proprietor and will not indicate whether AB Pty Ltd holds the land as trustee or as trustee for a particular trust.

The exception relates to Queensland real estate.  It is possible to record on title that Queensland real estate is held as trustee.  The title description will be “AB Pty Ltd as trustee”.  However, it is not possible to record in the title description the name of the particular trust for which the property is held.

For some types of property there is no title recording system.  For example: collectables, bullion and other physical objects.   In this situation ownership is established by the acquisition documents and evidenced by inclusion in the fund asset register.

The ATO is (naturally therefore SMSF Auditors are) rather keen on SMSF trustees evidencing ownership of real estate as a fund asset by suggesting that SMSF trustees should have Declarations of Trust executed in respect of real estate or, less satisfactorily, registering caveats on title which disclose that the real estate is a fund asset.

Care must be taken in executing Declarations of Trust.  In some jurisdictions a Declaration of Trust (even if the real estate is not identified in the declaration) will be liable for duty.  For example, in NSW such a Declaration will be liable for $500 duty.  Where the Declaration of Trust identifies the real estate, the SMSF trustee must be very cautious that the wording of the Declaration does not give rise to ad valorem duty.

If the Declaration of Trust is correctly worded ad valorem duty will not be involved and even nominal duty (even NSW nominal duty of $500) will be not involved; the choice of text in the Declaration is everything.

Use of caveats can be a practical alternative to Declarations of Trust.  Even though there are technical queries as to whether a registered proprietor can lodge a caveat against their own holding – these technical issues will generally not arise unless and until a third party attempts to register a transfer or mortgage in relation to the real estate.  

Further assistance

If SMSF Advisers and trustees require legal assistance to prepare a suitable Declaration of Trust or caveat, please contact SUPERCentral’s associated legal firm – Townsends Business & Corporate Lawyers.