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Self Managed Super Fund (SMSF) Article
By Tony Negline.
This article may be out of date.
24th March 2004
In the good old days almost anyone could run a small super fund.
With the creation of Self-Managed Super Funds in May 1999, the government also introduced a new set of rules that determine who can be members and trustees of these funds. Everyone involved in SMSFs must know these rules. Even simple Mum and Dad SMSFs need to take care.
At a basic level, if the SMSF trustees are individuals then each trustee must be a member and each member must be a trustee. If the SMSF trustee is a company then each director must a member of the fund and there may be no other directors or members.
There are some exceptions to these rules concerning single member funds, children under 18, the mentally incapacitated and those not allowed to be SMSF trustees or members, such as undischarged bankrupts.
If a single member SMSF wants to have the member as a trustee, then it must also have another person as a trustee. That non-member trustee must be the member’s relative, or if not a relative then, the other trustee must not employ the member.
A single member SMSF can use a single director company as trustee as long as the member is the director. A two director company may be a single member SMSF trustee. One director must be the SMSF member. The other director must be either the member’s relative or, if not a relative then, the other director must not employ the member. Companies requiring more than two directors may not be trustees of single member SMSFs.
Children under 18 can be SMSF members but someone else has to act as trustee for them because children cannot legally act. This replacement trustee must be either the child’s parent or court appointed guardian.
A similar rule applies for people who are mentally or physically unable to act for themselves and have a Court appointed Legal Personal Representative. The LPR acts as trustee for the disabled person.
Undischarged bankrupts, people who have been convicted of an offence involving dishonesty (such as theft, embezzlement or fraud) or have committed a serious breach of the super laws are all disqualified from being trustees of SMSFs and hence cannot be members. Great care must be taken here because the super laws ignore the statute of limitations (10 years in most jurisdictions).
There are also limitations on who can be members of the same SMSF.
Within a SMSF each member must be ‘linked’ to all other members. The linkage occurs either through family or business relationships. If these linkages are broken, a fund has just six months to fix the situation or potentially face severe penalties.
Often unrelated business partners join the same SMSF for convenience, simplicity and possibly to save money. Problems can arise if the business partners decide to go their separate ways. These problems can be greatly magnified when the split occurs because of some disagreement.
The decision about whether or not to have a company as trustee is an important matter. Many SMSF funds automatically select individual trustees because it appears simpler and cheaper. A sole purpose SMSF trustee company seems a waste of money and time.
A SMSF with individual trustees may only pay out ‘old age pensions’, which means lump sum payments are not possible. There is doubt as to whether or not an allocated pension would satisfy this ‘old age pension’ requirement because it can be turned into a lump sum at any time. A company trustee doesn’t have these concerns (assuming the trust deed allows for lump sums and allocated pensions).
Individual SMSF trustees who become insolvent or bankrupt may have difficulty justifying what are super fund assets especially where record keeping has been poor.
All assets of a fund must be held in the name of all the individual trustees. If a member joins or leaves a SMSF, the official ownership of each asset must change. This can mean statutory, legal and other costs.
The death of a member trustee can create almost insolvable problems. The added burden of dealing with a stalled SMSF on emotionally strained survivors is sometimes heart breaking to see.
Some people are tempted to use a company they already have as their SMSF trustee. That company might be trustee of their family trust or might be used to run a business. The main driver is a desire to save costs or perceived simplicity. Problems can arise when super fund assets become tangled with family trust or business assets and it becomes difficult to verify which entity owns which asset.
For these reasons the extra expense of running a sole purpose SMSF trustee company can save a lot of aggro.
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