Tax with Max: Avoiding the worst aspect of DIY funds
Summary: When an SMSF has two trustees and one dies, an extra person can be appointed to act as an individual trustee or a company can be formed to take over as trustee. These changes can be made earlier to avoid extra administration at the time of death. The SMSF's trust deed should set out the documentation needed to appoint an extra trustee. |
Key take-out: There is no legal requirement that SMSFs change the name investments are held in when there is a change of trustee. Instead of changing all investments, trustees may only change names on key items such as bank accounts. |
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation. |
As you know each week I answer subscriber questions in a Q A format. This week I want to devote the column entirely to an issue which constantly crosses my desk – what to do if a trustee in an SMSF dies? It can be a bureaucratic nightmare if you blindly follow the generally accepted procedures. Alternatively, if you don't take certain steps you can save a lot of time, expense and stress.
Under the SMSF rules there must always be two individuals appointed to act as trustees for an SMSF. There is the possibility of having a single member fund but there must be a second individual appointed as a trustee.
By contrast where a company is appointed to act as trustee for an SMSF all members must be directors. When there is a single member SMSF there only needs to be one director of the trustee company.
Considering the options
When two individuals act as trustee for an SMSF, and one of them dies, one of the following must occur:
· another person is appointed to act as an individual trustee,
· a company is formed to take over as trustee with the remaining member as a director,
· the SMSF's investments are converted to cash and the surviving member's benefits are rolled into an industry or public offer fund, or
· the SMSF is wound up and the benefits are paid out to the surviving member.
To avoid this administration burden at the time of death of one of the members an extra person can be appointed as trustee, or a company can be formed to take over as trustee from the members now.
The problem is that the administrative steps to be taken and documentation needed when appointing a new trustee, either by choice or as a result of death, will differ depending on who is providing the advice.
Some SMSF administration providers and lawyers state that when there is a change of trustee a deed must be drawn up to document the change. This can involve the members in a cost that in many cases is not warranted.
Adding a new trustee
The documentation required to facilitate the resignation of individual trustees, and the appointment of an extra individual or company to take over as trustee, should be set out in the SMSF's trust deed.
In many trust deeds I have seen there are clauses that say trustees of an SMSF can be removed and appointed when all or more than 75 per cent of the members agree to it in writing.
This means trustees in most cases, if the deed allows it, only need a resolution signed by all members to be drawn up. The resolution would detail the resignation of the individual trustees and the appointment of the company as trustee.
There may be other requirements such as requiring acceptance in writing by the new trustee of the fund. This can simply take the form of a letter written by the directors of the company accepting the appointment of trustee.
Changing the names on investments
Once a new trustee has been appointed, whether that is an additional individual or a company, there is extra administration work that can be required relating to the name that the SMSF's investments are held in.
If the ATO and some sectors of the SMSF advice industry can be believed the name that all investments are held must be changed. Upon investigation I found that this requirement has more to do with what is regarded as best practice, rather than something that is a legal requirement.
To make sure I hadn't missed something I contacted the ATO and requested details of the relevant legislation that supported their opinion. In responding the ATO only quoted the legislative requirements of SMSFs assets being kept separate from the members' and employers' assets, and that an SMSF must prepare an investment strategy regularly.
This means the ATO's requirement for SMSFs to change the name investments are held in when there is a change of trustee is more of a wish, rather than something that is required by legislation.
The amount of administration work in changing the name on all investments, where an SMSF holds direct shares and managed investments, can be considerable. In addition depending on the state where the managed investment register is held, trustees can pay stamp duty on the name change, despite there being no change in beneficial ownership.
In addition to paying stamp duty an SMSF can also pay fees charged by share registries for off market transfers to register the name change. The task of changing the name that managed investments are held in is made harder because the documentation differs between fund managers.
Instead of changing all investments trustees can limit their work to only the critical. These will be to change the name that bank accounts and share service accounts are held in.
The more user friendly banks, after being provided with the relevant documentation, will allow the name on the bank account to be changed. Some banks can require the existing bank account to be closed and an account opened in the name of the new trustee.
Given the work involved in advising share registries and fund managers of the new bank account where income is to be deposited, if a bank requires a new account to be opened, trustees should take this as a signal to look for a more SMSF user friendly financial institution.
If all other investments of the SMSF are clearly shown as being owned by the fund, in other words they are held in the individual's names as trustee for the super fund and the deed does not require it, there is no legal requirement to change the name to the new trustee.
Instead a resolution can be passed by the members that states all investments previously held by them, in their capacity as the previous trustees of the SMSF, will be continue to be held on a custodial basis on behalf of the fund and the new trustee.
Looking out for roadblocks
Some experts have said that this cannot be done. If this was the case all super funds that hold managed investments through platforms, where the investments are held in a custodial capacity by the platform, would be in breach of SIS and other regulations.
One of the other major roadblocks for SMSF trustees, wanting to take the minimalist approach to changing the name the investments are held in, could be the auditor of their fund.
This matter was put to the auditor of our firm's SMSF funds. After some debate, and providing evidence of there being no legislative requirement to change the name that investments are held in, the auditor confirmed what was being proposed would not result in an audit contravention report.
SMSF trustees before taking any action to change the trusteeship of their fund should first check their fund's deed, and then consult with their accountant or administration service. If the process will cost thousands of dollars, and involve the trustees in mountains of paper work, trustees should seek a second opinion.
Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.
Note: We make every attempt to provide answers to readers' questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.
Do you have a question for Max? Send an email to askmax@eurekareport.com.au