We are just through the end of the 2016 financial year! We have had the longest and most uninspiring Federal Election thrust upon us, with both major parties rattling placards that threaten to turn SMSFs on their head. Oh yes … there is the shock outcome of Brexit and financial markets as flat my nearby car park.
It’s also that time of year when many messy SMSFs appear for audit. Often these have pushed into the “too hard basket” and have several years outstanding.
How Messy Can They Be?
If the excitement of June 2016 wasn’t enough, imagine this…..you have started working with an accountant or administrator auditing their SMSFs, then one day the principal says (in a hushed voice)
“I have another fund I’ve been sitting on for years…. And by the way, I don’t have a trust deed and all the trustees and members are dead!”
Next comes the question,
“What should I do”?
Once I picked myself off the floor and regained my composure, I probed him further:
- When did the last trustee(s) pass away? ANSWER –2 years ago.
- What type of trustee structure did fund appear to have? ANSWER – Individuals
- Has any an alternate trustee structure been implemented? ANSWER – No
- Do the deceased trustees/members have any surviving family? ANSWER – Only overseas
- Did the previous auditor issue an Unqualified Audit Report? ANSWER – Yes
That moment – Houston, we’ve had a problem!!
With these few facts – I soon realised that the compliance implications could be complex and far reaching. It was time to get more information!! For example:
- A brief history of the fund, so far as it is known, who was involved in it’s setup?
- In the absence of a deed – any other minutes or establishment documentation?
- Any documents have been lodged with authorities?
- Most recent Financial Statements, Tax Returns and prior Audit Reports?
- Death certificates, wills, death benefit nominations
- Details of executors, legal personal representatives and beneficiaries?
- What if any records do the Executors hold, or can they obtain?
- What legal firm was involved in the estate work?
- Bank account details and other investments, so far as they are known?
- Who has authority to operate the bank accounts?
- Have the assets been accessed, by whom and when?
- Any insurance documents?
- Were the deceased involved with a business maybe current or former employees may have details or records?
- Is there a previous accountant who may have details?
- Was there a financial planner who was previously involved who may have records?
Even after all this information is obtained, clearly this will not be an audit to be taken lightly.
What are the Potential Compliance Implications?
Any SMSF professional worth their salt knows that a SMSF is a type of trust. For a trust to exist, there must be a corresponding executed deed. The deed is like the “backbone” of a SMSF. It sets out the governing rules and without it … the whole structure of the SMSF falls over OR is non-existent.
Occasionally there very genuine reasons why a deed may be absent. For example, the trustees have lost it in floods, fire or even moving house. Perhaps a jilted spouse decided to throw it out with other belongings. I do not hold myself out as a legal adviser … but I understand the deed can re-instated with a properly drafted statutory declaration (as advised by a qualified smsf legal adviser). Extreme caution must be exercised in these circumstances. Taking the wrong steps here runs the risk of resettling the fund.
In the case above where there is no executed deed, no living trustees/members and no identifiable legal personal representatives – then proving the very existence of the fund will be exponentially more complicated.
Even on a very simple analysis, there is a potential breach of the definition of a SMSF – per SIS Action 17A:
- Are all members of the fund – trustees of the fund? and
- Are all trustees – members of the fund?
Failure to satisfy this very basic requirement could render the SMSF non-complying! This in turn may result in the loss of its concessional tax treatment. There is also the question of WHEN the fund became non-complying? This could have real implications for concessional treated contributions and/or pensions paid (just to mention a couple of issues).
Assuming both trustees did not die at the same time, clearly there was a period when only one individual was trustee. It seems no action was undertaken at that point. So often it seems SMSF Trustees don’t understand their obligations. This is another good reason for having a corporate trustee.
I began to consider the risks involved and what “repair” work may be needed.
After a while I realised I was beginning to get into considering legal issues. As all non legal qualified advisors know, we are precluded from providing legal advice. The difficulty with SMSF work is so often the border may not be clear. Extreme care must be taken. Experience costs money but for this scenario a specialised knowledgeable lawyer is needed.
Ask Questions
The overall message for SMSF Auditors is to ask accounting firms,
“What are you holding in the bottom of the cupboard and have not told me about?”
And for firms administrating SMSF, to ask clients,
“Do you or other family members, have any investments in superannuation and which you have not disclosed to me?”
The suggestion for firms administrating SMSFs is to contact an experienced and ethical SMSF auditor and maybe also a solicitor, for assistance in putting together all the necessary information.
Accountants and SMSF Advisors – you need to be “in the loop”
Accountants and SMSF Advisors, make sure you are in the loop on all circumstances and actions taken by your SMSF clients. They may go to certain investment forums and set up a fund in connection with acquiring a real estate investment, maybe interstate or overseas. Or, they may execute minutes and other permanent documentation and not comprehend the need to give copies of documents to their accountant. Sometimes there can be a disconnect between the family and the business accountant. What information is contained in your permanent file?
It is important to explain to clients the need for you to have the total picture of a client’s assets and to get copies of documents. I feel the wider you can spread the documents the better.
It is so amazing that some SMSF contain many millions of dollars and are not properly documented. Although the family car may be carefully serviced, registered and insured.
As an auditor I am surprised how often there is no signed trust deed. If I asked an accountant or an SMSF adviser, do you have all the properly executed minutes, deeds and other permanent documents? – I wonder if they could respond with a resounding “yes”?
David Saul – Managing Director, Saul SMSF – article for SMSF Adviser – July 1, 2016
Saul SMSF is a specialist SMSF audit practice within Australia – 1300 551 261 – www.saulsmsf.com.au
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