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ATO ID 2014/7 — latest from ATO on keeping SMSF assets separate

Australian Taxation Office Interpretative Decision ATO ID 2014/7 provides the latest on the rules regarding keeping SMSF assets separate.

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It suggests the position is very strict. However, a deeper technical analysis reveals there might often be some ‘flexibility’.

This article concludes that the critical practical implication is that each SMSF should have a sole purpose corporate trustee.

Facts of ATO ID 2014/7

The facts of ATO ID 2014/7 are as follows.

The trustees of the SMSF are members of a family.

The fund has a standard employer-sponsor and all the trustees work for the standard employer-sponsor in various capacities.

There are several unit trusts owned and operated by the SMSF and/or the trustees.

The trustees have stated that, for administrative simplicity and cost savings, unit trusts jointly owned by the SMSF and trustees as well as unit trusts owned solely by the SMSF all operate using the one bank account. The account is held in the name of the SMSF.

The relevant issue was as follows:

Has a contravention of section 34 of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) occurred where a Self Managed Superannuation Fund (SMSF) shares a bank account with related unit trusts?

The ATO decided that:

Yes, an SMSF must open and maintain its own bank account, as it is required to keep its assets and money separate from that of other entities.

How this might pan out in real life

This seems like a very ‘cut and dry’ situation. However, there is more to the picture.

Section 34 of the SISA requires that certain operating standards must be complied with. A relevant operating standard is as follows (Superannuation Industry (Supervision) Regulations 1994 (Cth) reg 4.09A(2)):

A trustee of a regulated superannuation fund that is a self managed superannuation fund must keep the money and other assets of the fund separate from any money and assets, respectively:
(a) that are held by the trustee personally; or
(b) that are money or assets, as the case may be, of a standard employer-sponsor, or an associate of a standard employer-sponsor, of the fund.

Accordingly, if there is no standard employer-sponsor, it is essentially impossible to contravene regulation 4.09A(2)(b). In other words, if there is no standard employer-sponsor, half the operating standard is automatically complied with!

This raises the question of what is a standard employer-sponsor.

A standard employer-sponsor is defined in section 16 of the SISA as being:

an employer [that] … contributes, or would contribute, [to a fund] wholly or partly pursuant to an arrangement between the employer and a trustee of the regulated superannuation fund concerned.

Historically, most employers decided which superannuation fund was used for its employees.

This can be contrasted with an employer who contributes because the member tells to the employer to contribute. (This arrangement is now very common, unlike a standard employer-sponsor arrangement, which is not as popular.) Section 16 goes on to make it clear that such an employer is not a standard employer-sponsor, stating:

If the employer only so contributes, or would contribute, pursuant to arrangements between the employer and a member or members of the fund, the employer is not a standard employer-sponsor.

In short, it is now not as popular to see an SMSF with a standard employer-sponsor as was the position many years ago. Accordingly, the exact facts of ATO ID 2014/7 are unlikely to occur due to few SMSF having standard employer-sponsors.

Why a deed update might be needed

Generally the only time that an SMSF has a standard employer-sponsor these days is where the deed names one. Indeed, many SMSF deed suppliers have a deed or form for participating employers included that requires completion by an employer who wants to contribute to the fund which often evidences such a relationship.

When DBA Lawyers updates SMSF deeds, we carefully draft the documentation to remove the standard employer-sponsor role. This assists in minimising contravention risks.

What about regulation 4.09A(2)(a)?

As discussed, it’s impossible for an SMSF to contravene regulation 4.09A(2)(b) if there is no standard employer-sponsor, and most SMSFs do not have standard employer-sponsors. (Again, the ones that do can usually address this with a deed update from DBA Lawyers.)

But what about regulation 4.09A(2)(a)? Again, it provides:

A trustee of a regulated superannuation fund that is a self managed superannuation fund must keep the money and other assets of the fund separate from any money and assets, respectively: … (a) that are held by the trustee personally …

As you will appreciate, it is easy for this to be contravened where an SMSF has individual trustees (eg, if an individual mixes their own assets with those of the SMSF).

However, if the SMSF has a corporate trustee where the corporate trustee’s only function is to act as trustee of the SMSF, then regulation 4.09A(2)(a) becomes almost impossible to contravene! This is because the trustee is unable to mix fund assets with its personal assets as it’s unlikely to have any personal assets.

Therefore an SMSF that has a sole purpose corporate trustee and a DBA Lawyers deed is almost always guaranteed to comply with these rules. Small wonder the ATO state on their website:

The easiest way to comply with these rules is for your fund to have a company set up solely for the purpose of being the corporate trustee of the fund. If there is a change in directors of the company, you don’t have to change the name on the ownership documents for each fund asset as the trustee of the fund is still the same.

This benefit of a sole purpose corporate trustee — that is, almost assured compliance with regulation 4.09A(2)(a) — is not well known. However, there are many other benefits and industry consensus is that a sole purpose corporate trustee is far superior to individual trustees.

Unfortunately, sole purpose corporate trustees are rare. The ATO has stated:

At 30 June 2013, almost 76% of all SMSFs had individual trustees rather than a corporate trustee…

Analysis shows over time there has been a consistent shift away from corporate trustees. In the three years to 2013, there was a 1% decline in SMSFs registering with a corporate trustee. Approximately 90% of newly registered SMSFs in 2013 had individual trustees.

Finally, another reason why not having a standard employer-sponsor involved with an SMSF is not to give rise to unnecessary in-house asset issues. That is, if there is an investment in or loan to a standard employer-sponsor, then that investment or loan is an in-house asset and if it exceeds the 5% limit under Part 8 of the SISA, then a contravention will have occurred. There is no need for control or have more than 50% voting rights, etc, in respect of a standard employer-sponsored relationship.

DBA Lawyers offers new company incorporation and SMSF change of trustee services for SMSFs looking to convert to a sole propose corporate trustee structure.

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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.

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