Practical SMSF tips

In this article I seek to set out some practical tips for setting up SMSFs.

Less is more

When naming an SMSF, there are basically no restrictions on what name you can choose. As a guiding rule though, in my opinion, the shorter the name, the better.

For example, it is perfectly allowable for an SMSF to be called ‘The John Smith Family Executive Superannuation Fund’. However, that name will need to fit on bank statements in respect of bank accounts that could have significant dollars in them! The same can be true in respect of other asset registers that allow you to register the SMSF’s name.

Also, many bank computer systems will not allow such a long name. Instead, they will truncate the name. Accordingly, that can create uncertainty as to the true name of the SMSF, or even in an extreme situation, it can create uncertainty as to whether there are multiple SMSFs!

Therefore, my preference is to keep names as short as possible. Further, I would suggest the following:

• Do not use the word ‘The’ in the name.
• Do not use the word ‘Superannuation’ — I believe the shorter, yet equally comprehensible, ‘Super’ is preferable.
• Omit other words (eg, ‘Family’ and ‘Executive’).

Thus, using the above example, my personal preference is to call the SMSF ‘Smith Super Fund’. It’s short enough to almost be guaranteed to fit on any bank statement or similar record.

Avoid numbers in names

One of the most elite units in the US armed forces was originally called ‘SEAL Team Six’. Although there were only two SEAL units at the time, the name was chosen to confuse the Soviets. This naming strategy might have been a good idea during the cold war, but in my opinion the same is not true when naming SMSFs. Here’s why.

Naturally, there is no limit on the number of SMSFs a person can have. For asset protection and other reasons it can make sense for some clients to have multiple SMSFs. For such clients, there is a temptation to put numbers in names, such as calling the second SMSF ‘Smith Super Fund No 2’, the third SMSF ‘Smith Super Fund No 3’, and so on.

However, assume that certain clients (John and Mary Smith) have done just this and then a tenant of commercial property in the second or third super fund sues the landlord (ie, the SMSF trustee). If the name of the SMSF is ever disclosed to the tenant, it starts to suggest that there are other SMSFs with other assets (ie, that the plaintiff might have found a wealthy defendant).

Further, the numbering system also causes difficulties if an SMSF is wound up. Consider an SMSF called ‘Smith Super Fund No 2’ that pays out all of its assets and then has no further purpose and so is wound up. If it leaves behind ‘Smith Super Fund No 3’, anyone looking at that might ask the logical question: where is ‘Smith Super Fund No 2’?

Accordingly, instead of putting numbers in SMSF names, I suggest something along the following lines. Call the first SMSF ‘Smith Super Fund’, call the second SMSF ‘J&M Super Fund’, call the third SMSF ‘Smith Retirement Fund’, and so on.

Sole purpose corporate trustees right from the start

It’s trite to say, but of course a corporate trustee is best and it should be used right from the get go.

Some people adopt the view that it’s too expensive to use a corporate trustee at the start when the SMSF might not be comparatively large yet. Rather, they feel they will implement a change of trustee later when the SMSF is worth more than say $500,000 or $1,000,000.

However, there is a certain advantage in having a corporate trustee right from day one. That advantage is that you have don’t have to make any changes later to the trustee structure. This seems like such an obvious statement that it’s not worth mentioning. However, the benefit is larger than many realise.

The documentation necessary to change a trustee is legal documentation and a lot of people incorrectly prepare it. Even lawyers might incorrectly prepare it. Consider, for example, the case of Moss Super Pty Ltd v Hayne [2008] VSC 158. This case involved an SMSF that had had a change of trustee. The validity of the appointment of the new trustee was challenged on the basis that the existing deed required that a certain person sign the appointment documentation in one capacity and not in the capacity that that person actually did sign. Byrne J held that the challenge identified a legitimate flaw in the purported change of trustee and accordingly the entity that thought it was the new trustee was not.

This highlights that any change of trustee may potentially be invalid. If, however, a company that was registered for the sole purpose of being a trustee is used right from the SMSF’s commencement, odds are no change of trustee will ever be needed, and thus there is no opportunity to make any mistakes.

Similarly, because there is no change of trustee required, there is no change of trustee documentation that can be lost. Although it is obvious to say that change of trustee documentation is important and should be retained, change of trustee documentation does get lost and that can raise questions over the legitimacy of the entity acting as trustee.

Naming corporate trustees

When naming the company that will act as trustee of the SMSF, similar considerations apply as when naming the SMSF: shorter is better and avoid numbers.

Accordingly, when naming companies I prefer to use ‘Pty Ltd’ instead of ‘Pty. Ltd.’ or ‘Proprietary Limited’.

Unlike SMSFs, each company must have a unique name and certain words are effectively banned from company names. The two most common banned words from company names that people want to use are ‘Trust’ and ‘Trustee’. However, the word ‘Super’ is allowable. Accordingly, I prefer a name like ‘Smith Super Pty Ltd. That being said, because company names must be unique, that exact name typically will not be available and something like ‘J&MS Pty Ltd’ could be used instead.

Conclusion

Nothing I’ve said in the article must be prescriptively followed. Rather, this article is just my opinion on some practical tips that, based on my experience in the superannuation industry, could help make the process of administrating an SMSF easier and reduce possible issues further down the track.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold SMSF CPD training at venues all around Australia and online. For more details or to register, visit www.dbanetwork.com.au or call Marie on 03 9092 9400.