One area that often trips up SMSF trustees is the ownership of assets.
You need to remember the ownership of your fund’s assets must be in the name of all your fund’s trustees.
This means if the Smith Super Fund’s members are Bob and Mary Smith, who are its individual trustees, then you need to make sure that its assets are owned by Mary and Bob.
In an ideal world they’ll be owned by “Robert Smith and Mary Smith As Trustee For the Smith Super Fund”. (“As Trustee For” is often shortened to ATF.)
However in some cases – primarily real estate in all States and Territories except Queensland – it’s not possible to show the owner on a property’s title in this way.
Titles Offices only accept “Robert Smith and Mary Smith” as the owners of the property, either as tenants in common or joint tenants.
This raises a number of problems for SMSF investors. In particular, how do you adequately demonstrate that a particular piece of real estate actually belongs to a super fund?
In addition, how would you stop Bob and Mary from dealing with this property as if it were their own? For example, they might offer the super fund’s property as security on a loan. Or they might sell the property and personally pocket the cash.
Some solutions – declarations of trust and caveats
In some cases, it may be possible to execute a Declaration of Trust. That is, a document where Bob and Mary declare that the asset is owned by them as SMSF trustees.
On the face of it, this seems like a sensible idea. However it comes with a catch. The wording of this document is vital because sometimes State or Territory Revenue Offices might argue that by executing this document you have dealt with a property again and impose ad valorem Stamp Duty on the super fund’s property for the second time.
The simple message here is that if you want to use a Declaration of Trust, then it would be unwise to try and draft this document yourself or to download a cheap pro-forma document from the Internet.
Another option is to place a caveat over the property. This can sometimes be helpful but there are no guarantees that a mistake won’t be finalised with this approach. A caveat only prompts the Titles Office to contact the caveat holder when someone tries to change a property’s title. If the caveat holder doesn’t come forward within a certain period of time (typically 30 days) then the property’s title will be amended accordingly.
Some SMSF investors will want to use a caveat because there has been a change in the membership of their SMSF (which changes the trustees of their fund) and they want to avoid the cost of adjusting a property’s title. The new trustees place a caveat over the property so the property hopefully won’t be sold without their prior approval.
Leave a “documentation trail”
In reality, what’s needed is very good documentation. Sometimes it might suffice to show that a property is owned by a super fund, by demonstrating that it has been included in a super fund’s financial accounts for many years.
At the very least, a property’s contract of sale needs to clearly state that it’s being purchased by the super fund. The deposit and all other outgoings need to be paid for by the super fund.
Copies of all payments (especially cheques and bank statements) and sale documentation should be retained for as long as the property is owned and then possibly longer. This documentation is often needed for Federal tax issues (for example CGT).
This document trail is also needed when a super fund’s accounts are audited each year. An SMSF auditor will want to see appropriate documentation. Given the limitations of Declarations of Trust or caveats, this means documents showing the original purchase and annual outgoings for a property are essential.
In my view, the best solution to this problem is to use a corporate trustee specifically set up to be trustee of your super fund. This is not only a simple solution, it is also more cost effective.
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.
Also in the Switzer Super Report:
- Charlie Aitken: Why Woodside is a yield play
- Olivia Long: My SMSF
- Roger Montgomery: Blackmores – not quite what the doctor ordered?
- Penny Pryor: Buy, Sell, Hold – what the brokers say
- Gavin Madson: Are ETFs the way to invest in bonds?
- Paul Rickard: Question of the week – Safe investments
