Initial contributions key to establishment

Initial SMSF contribution

Initial contributions for a new SMSF should satisfy the establishment test to prevent an ongoing obligation to prove the fund is compliant.

Advisers should do their utmost to ensure a new SMSF can satisfy initial contribution establishment requirements in order to avoid an ongoing obligation to prove compliance, a legal expert has said.

Cooper Grace Ward senior associate Steven Jell pointed out SMSFs had two options for satisfying the requirement that the fund be established in Australia and urged advisers to do everything in their power to ensure the initial contribution establishing a new SMSF was received by the trustee in Australia in order to pass the establishment test once and for all.

Jell said the risk of not ensuring the initial contribution satisfied this criteria would leave the SMSF with an ongoing obligation to continuously prove the validity of the fund and remain compliant.

“The fund must either be established in Australia or have at least one asset located in Australia,” Jell said today during a Cooper Grace Ward webinar.

“In order for the fund to be established in Australia, it’s not just as simple as making sure the trust deed is signed in this country. [It’s a] little bit more complex than that.

“If the trustees sign the deed in Australia but do not receive a contribution in Australia, the fund would be deemed not to be validly established inside Australia, so we need to make sure that initial contribution takes place and that it’s received by the trustee in this country.”

He said a fund that met this part of the establishment test by having an Australian bank account in order for an initial contribution or rollover to be made directly to the fund would be deemed an SMSF established in Australia and would always continue to meet this necessary requirement.

Not satisfying this criteria and relying on having at least one asset located in Australia in order to comply with the establishment test would mean the SMSF would be left with an ongoing obligation to meet this requirement and risked being non-compliant as a result of failing to meet this requirement in the future, he added.

“If the trust deed is signed here [and] no initial assets [are] received here, but we’ve got an asset located in Australia, then we can still comply with the establishment test,” he said.

“[But] if we’re relying upon the fund maintaining an asset located in Australia to pass this test, then it’s a continuous test. There’s an ongoing obligation to ensure that single asset, one or more, is actually located in Australia.”

Cooper Grace Ward partner Clinton Jackson said: “Realistically, from an adviser’s point of view, you want to do everything possible in your power to make sure the client satisfies the first option because obviously then it’s a ‘set and forget’.”

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