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New client considerations

Advisers need to take into account several factors when contemplating servicing a new SMSF client. Michael Hallinan looks at a dozen important issues for practitioners to assess in these situations.

When taking on a new SMSF client, should an adviser first undertake an engagement audit of the fund? If so, why? And if such an audit is to be undertaken, what issues should the adviser consider?

An engagement audit is simply an investigation into the SMSF – its structure, regulatory status and significant transactions – with a view to obtaining a check of the health of the SMSF. This is to determine what issues need to be rectified and in what order and with what priority. It may be there is nothing to rectify.

However, it is better to identify any rectification issues before formally taking on the SMSF as a client for two reasons: firstly, to know what you are taking on in terms of time, effort, urgency and seriousness, and secondly, to correctly determine the proper level of fees to charge.

Further, there is the advantage of dealing with the hard issues at the start of the client relationship, the best time to deliver bad news and the time the trustee is most likely to accept the need to address any issues. If the trustee is unwilling to face up to issues at the start of the relationship, they are likely to continue with an attitude of denial, in turn undermining the role of the adviser.

If an engagement audit is to be undertaken, what are the main issues to consider? My experience in the sector has enabled me to identify 12 of them. This list is not definitive, but is simply a starting point for SMSF advisers when assessing a potential new client.

Issue 1: Is the SMSF registered with the ATO?

The starting point is whether the SMSF has been registered with the ATO and has complying status. This is undertaken by searching the Super Fund Lookup website. If the SMSF has been recently established, that is, the first annual return has not been lodged, then confirmation of the registration should be obtained. Needless to say if the SMSF is non-complying, or if the registration process has not been undertaken or undertaken more than 60 days after the establishment of the fund, there are very serious issues requiring attention.

Issue 2: Does the SMSF have any overdue returns?

Non-lodgement or late lodgement of annual fund returns is a key indicator to the ATO the SMSF requires a higher degree of attention. One of the key objectives of an SMSF adviser is to ensure the fund has a low profile with the regulator. Having outstanding annual returns is a key indicator of more significant issues, such as trustee disharmony or unresolved audit issues.

Issue 3: Is the SMSF the subject of any ATO audit activity?

If the SMSF is currently receiving ATO audit attention, presumably there is some good reason for it. At the very least, dealing with the ATO audit may involve significantly more time and effort than originally estimated, thereby forcing a reconsideration of the fees charged. Also, it may suggest very serious regulatory issues that will need addressing.

Issue 4: Is the SMSF correctly structured?

It must be determined if the fund satisfies the definition of an SMSF. The primary concerns are whether the fund satisfies the four-member rule, the member participation rule and the no-employee rule. If the SMSF does not satisfy any of these rules, the adviser will have to find out if any exceptions apply to justify the non-compliance, such as the ‘relatives’ exception to the no-employee rule.

Issue 5: Are the trustees qualified?

The term qualified is used in the sense of being eligible for appointment as trustee/director and also in the sense of not being disqualified. For example, an adviser needs to know whether the written consents of the trustees/directors are on file. Have they signed the ATO declarations? Are any of the trustees/directors disqualified to continue to act because they are insolvents under administration (for example, bankrupt or entered into a personal insolvency agreement as a debtor)? Have they been disqualified under the from acting as a director or under the from acting as director of a corporate trustee or as a trustee?

Issue 6: Are all of the SMSF’s constituent documents existent?

The constituent documents of an SMSF include the establishment deed and any amending deeds, as well as the documents constituting any changes in the trustees (appointments or removals) and for a corporate trustee the constitution of the company. The days when an SMSF can continue to function when the establishment deed or replacement deed has been lost are over. At the very least a new deed needs to be executed to regularise the operation of the SMSF. Another category of constituent documents relates to changes to the trustee. Trustees must be properly appointed or removed. If there are any defects in the appointment of trustees, any subsequent deed amendments are likely to be invalid. Consequently, any changes in trustees should be reviewed to ensure the correct party appointed the trustees and the required method of appointment was used.

Issue 7: Is there a documented investment strategy?

Every superannuation fund must have a documented investment strategy that has been approved and adopted by the trustees. The first issue is whether the investment strategy has been documented, as opposed to simply being retained in the mind of the trustees. The second issue is whether the investment strategy is appropriate to the current circumstances of the fund. The first issue is relatively easy to determine, while the second issue is much harder to establish but need not be an initial priority.

Issue 8: Are the fund assets correctly identified and title to the assets correctly recorded?

The essence of any superannuation fund is the assets. The primary role of the trustee of a superannuation fund is to protect these assets and preserve and enhance their value through proper investment. The SMSF adviser should determine whether there is an investment register or other means to identify fund assets, and whether the assets are sufficiently protected. Protection in this context means that they are under the control of the trustees (or their agents), that title to them is recorded in the names of the trustees (or name of the corporate trustee), title records are in the custody of the trustees and, for tangible assets, are adequately covered by insurance if possible.

In the case of individual trustees, title to the assets must, unless the governing rules expressly provide otherwise, be held in the names of all trustees. Title to fund assets should not be held in the name of former trustees or third parties except where required by statute, such as title being held by a holding trustee where the property is the subject of a limited recourse borrowing arrangement (LRBA).

Issue 9: Has SMSF succession been addressed?

Succession in this context means the control of the SMSF in the event of the mental or physical incapacity or death of one or more of the trustees/directors.

The succession plan may involve enduring powers of attorney being given by each trustee and the inclusion of special provisions in the governing rules so that mental or physical incapacity of a key member will not cause the management of the SMSF to cease to operate. Further, in the context of a corporate trustee, this may still involve including special provisions in the constitution of the corporate trustee.

To deal with succession issues in the context of a corporate trustee, the shares in the corporate trustee could be held jointly between the member and a trusted adviser. On the death of the member, and their ceasing to be a director, the trusted adviser becomes the owner of the share, by right of survivorship, and is in a position as shareholder to appoint, by way of resolution of a general meeting of the company, a replacement director or directors.

This mechanism avoids the need to wait until the will and testament has been probated.

To deal with the succession in the context of the death of one or more trustees, this may mean restructuring the trusteeship from individual trustees to a company as a corporate trustee.

Issue 10: Has benefit succession been addressed?

Benefit succession means the rules and documents by which the benefits payable upon the death of a member are allocated in the manner contemplated by the deceased member. This may involve the member making binding death benefit nominations (BDBN) or by ensuring any pensions are reversionary and the intended recipient has been nominated as the reversionary beneficiary.

In particular, the adviser must determine whether the BDBN and the pension nomination of a reversionary beneficiary are either consistent, where each nominates the named individual, or are intended to operate in their own respective spheres. For example, the superannuation interest represented by the pension is to be allocated one way and all other benefits of the member are to be allocated pursuant to the terms of the BDBN.

Given the significance of super benefits, the adviser will need to determine, if the pension is intended to be reversionary, whether the revision has been sufficiently documented, and similarly in the case of a BDBN whether the formalities for a binding nomination have been satisfied. In the case of SMSFs, the governing rules could expressly or implicitly include a three-year duration and will-like execution requirements, or expressly exclude those requirements.

Issue 11: What are the current significant transactions of the SMSF and do they need review?

Significant transactions could include running a defined benefit pension, having a current LRBA, having entered into an off-the-plan purchase, or having acquired real estate on a concessional stamp duty/transfer duty basis.
The issue with defined benefit pensions is they either have reserves that, on the unexpected death of the pensioner, can cause the reserves to be locked in or that these reserves are insufficient to support the pension, resulting in the defined pension being restructured into a market-linked pension.

LRBAs must be reviewed where the lender is a related party to determine whether the arrangement is uncommercial, and if so, whether the arrangement can be restructured to operate on a commercial basis.

Off-the-plan purchases before the subdivision plan is registered constitute significant contingent obligations for the SMSF. Ultimately the fund will have to finance the contingent debt owed to the vendor.

The issue with the acquisition of real estate on a concessional stamp duty or transfer duty basis is the price of the concession is usually some restraint on the SMSF, such as not having or not admitting individuals who are not relatives (such as the concession provided by section 71CC of the ) or requiring the real estate to be only used to provide benefits to a member (such as section 62A of the ). If these restraints are breached, the previously granted concession may be withdrawn and full duty imposed on the transfer.

Issue 12: Is the current trust deed out of date?

There are three significant features of out-of-date trust deeds. Firstly, they generally do not permit the payment of transition-to-retirement pensions because such pensions only came into existence in 2007. Secondly, they either do not have borrowing sufficient for LRBAs or, alternatively, the borrowing powers are too generic to satisfy the legal advisers of lenders. Lastly, they tend to retain redundant features, such as principal employer provisions, so that the amendment power, or the power to appoint new trustees, cannot be exercised with the consent of the principal employer, or sometimes those powers are conferred on the principal employer. These redundant features are particularly annoying if the company that was the nominated principal employer has been wound up, deregistered or sold to unrelated parties.


While most of the issues listed above are not sufficient to cause an adviser not to accept an SMSF as a new client, possibly with the exception of the first reason, they need to consider whether any of these issues applies to the new client and, if they do, to assess the amount of time and effort needed to resolve the issues, as well as the relevant urgency of the matter. This will then permit an informed decision on whether to accept the engagement, to scope the engagement and to properly and fairly charge for the engagement.

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