An SMSF specialist practitioner has cautioned trustees about the potential consequences of using trusts to rectify compliance breaches when purchasing assets for SMSFs.
ASF Audits head of education Shelley Banton noted she had observed a rise in reported breaches of regulation 4.09A of the Superannuation Industry (Supervision) (SIS) Regulations 1994 due to the filing of poor documentation in relation to purchased assets, with trustees resorting to trusts as a workaround.
“One of the biggest issues we are seeing is where the trustee makes a mistake by putting the relevant entity as the owner [of assets purchased] and then tries to paper over the crack by setting up a declaration of trust,” Banton told attendees at an ASF Audits webinar on Tuesday.
“A declaration of trust is only good before the assets are purchased, not after, and if the asset is property, a declaration of trust signed after the purchase can trigger double stamp duty.
“Once the asset has been purchased, you need to put in place an acknowledgement of trust. There also has to be a very good reason as to why the asset isn’t being held on behalf of the trustee with a beneficial owner being the SMSF for that to be acceptable.
“There’s no guarantee that if you just send in paperwork that it’s going to be okay at audit and many more questions are going to be asked. It’s now the most commonly reported breach [to the ATO] and we’re expecting guidance from the ATO to be released at some point in the future on reg 4.09A.”
She also noted an SMSF using a related-party bare trust to address problems with asset ownership is also ineffective and will possibly result in further compliance contraventions for trustees.
“While there is a carve-out in section 71.8 and 71.9 of the SIS Act, which says an SMSF investment in a bare trust is not an in-house asset, [the act] states that the fund must [ensure] certain conditions are met, including that there is a limited recourse borrowing agreement (LRBA) in place that meets all the requirements set out under section 67A of the SIS Act,” she said.
“There’s no LRBA here, so technically there is a breach of section 71 and the asset then becomes an in-house asset of the fund.
“If you think that putting a related-party bare trust in place to get around a title-to-assets issue is going to solve the problem, all you’re doing is creating an even worse problem with an in-house asset issue to boot.”