Can you prove your super fund owns every asset? If you’re unsure you might want to check.

Take the following problems that were discussed on an online SMSF discussion forum recently about an individual trustee, two-member SMSF that has owned three different WA properties since sometime in 2001. The two fund members are husband and wife.

There are slightly different aspects to each property as follows:

1. A factory was bought by the husband in 1996 and transferred to the super fund in 2001. The problem with this property is that its title is only in the name of the husband and not in the two individual SMSF trustees. In 2001 it appears that an incorrect declaration of trust document was prepared, claiming that both the then current owners of the property were husband and wife. In any event, this declaration hasn’t been signed by the previous owners and SMSF trustees. It also hasn’t been stamped and lodged with the WA revenue authorities and titles office

2. It appears that the next property was purchased by the super fund in 2006 and is held in the husband’s and wife’s names. The purchase contract has long disappeared. Bank statements, that might be useful as evidence of the purchase, are also no longer available. There is no declaration of trust over the property on file.

3. The last property was also purchased in 2006 by the husband and wife. Their names appear on the contract of sale and the property’s title documents. It has been stated that this property was transferred to the super fund in 2009. There are no transfer documents but an unstamped declaration of trust document is in the fund’s files. The 2009 SMSF bank statements show a large withdrawal, which is said to be for the purchase of this property. This property is residential real estate and unlikely to be business real property

So the key questions worth exploring now are firstly, are these assets owned by the super fund; secondly, have the assets of the super fund been kept separate from the personal and business assets of the fund’s trustees and members; and finally, ordinarily super funds cannot acquire residential real estate from a member of the fund so did the super fund breach a basic superannuation rule?

Linder v Linder

In the Family Law Court case, Linder v Linder that I wrote about a while ago, there was some argument about the “Linder” SMSF’s ownership of listed shares which had been purchased in several parcels. The fund had individual trustees. One parcel was in the name of the husband and wife with no mention of the SMSF and no evidence could be found showing the SMSF had paid for these assets. The Court decided that those shares weren’t part of the SMSF for property settlement purposes.

Unstamped trust declarations

As I understand it, declarations of trust that haven’t been stamped by the relevant state or territory’s revenue authority aren’t admissible in a court. This makes it very difficult for a super fund to enforce its ownership of an asset.

Sydney based financial services lawyer, Peter Bobbin, said on the SMSF web forum that Sec 279 of the WA Duties Act states that unless a transaction record is duty endorsed (ie stamped) then it can’t be recognised by a court or tribunal. That is, the unstamped trust declarations appear worthless.

Duties Acts for NSW (Sec 304), Victoria (Sec 272) and Queensland (Sec 487) all have similar provisions.

Double Stamp Duty

Depending on the wording of the Duties Act in each state and territory it’s also possible that double stamp duty might be payable if the transfers were now to be formalised – once for the transfer and once for the declaration.

Possible future strife

As noted above, it would seem that the third property probably shouldn’t have been purchased by the super fund as it’s residential real estate.

The super laws contain a few pertinent provisions here. Firstly, the penalty for super funds acquiring assets from members and other related parties is one-year jail.

As I detailed in October last year, the super laws give the ATO a range of powers to address the possible illegal acquisition of the residential property from the super fund. The trustees will also have to deal with WA revenue authorities.

Finally, you can easily conclude here that the assets of the super fund and its members haven’t been kept distinctly separate.

Interestingly these issues have only come to light because the fund has a new auditor who noticed these problems.

If the fund’s new auditor reports these contraventions then it’s reasonably safe to assume the ATO would review the fund. If it had problems with the fund’s record keeping and compliance with the super laws, then it might want to have a serious chat with the super fund’s trustees and its former auditor.

Two final points

There are some good lessons in this case for all SMSFs. Inaccurate, incomplete or el-cheapo documenting of transactions is more than likely going to lead to trouble.

One interpretation of the above events is that the trustees have been too distracted to perform their trustee functions. It may be that they have legitimate excuses. The ATO might take that into account.

Secondly, they might also have relied on their advisers, who perhaps didn’t know the super laws as well as they should. In my many years of experience with superannuation, it would be fair to say that many accountants don’t know what they don’t know about super and are too busy to find out.

How are you meant to judge the competency of your trusted advisers? You might get a second or third opinion before major surgery or house renovations. I suggest you apply the same principle with your superannuation affairs.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.