The recent case of Frigger v Computer Accounting and Tax Pty Ltd (in liq) [no 10] [2016] WASC 63 serves as an important reminder to all self-managed superannuation fund (SMSF) trustees that assets should be kept separate in their funds.
The message I seek to draw from the case is the importance of using a company as a trustee of an SMSF, and more importantly a company that acts solely as the trustee of an SMSF (and acts in no other capacity). Although this is a basic message, this message is not being adopted by the industry. Consider the following statistics from the ATO:
• At June 30, 2015, 78 per cent of all SMSFs had individual trustees, rather than a corporate trustee
• In the three years to 2015, there was a 4 per cent decline in SMSFs registering with a corporate trustee. Of newly registered SMSFs in 2014, 95 per cent had individual trustees.
These are depressing statistics!
The facts
Frigger v Computer Accounting and Tax Pty Ltd (in liq) involved a company (Computer Accounting and Tax Pty Ltd), which, after a series of long-running litigation cases, was put into liquidation. (By the way, when I say long running, I mean it: a simple search of the online case citatory LawCite reveals well over 30 cases since 2007 in which the company was a party.)
By way of background, Computer Accounting and Tax Pty Ltd is the registered legal owner of real estate in Perth, an Armadale property, and a term deposit. The 2016 case, along with earlier cases (eg Computer Accounting and Tax Pty Ltd v Professional Services of Australia Pty Ltd [2008] WASC 133), indicates that the company appears to have acted as trustee of an SMSF as well as running an accounting business, which at its peak had around 400 clients.
The plaintiffs in the recent case, Mr and Mrs Frigger, are beneficiaries of the SMSF for which Computer Accounting and Tax Pty Ltd had acted as trustee. (By the time of the 2016 case, the Friggers were trustees of the fund.)
They claimed that the “two properties [were] held on trust for them, either as the beneficiaries of a resulting trust or as the beneficiaries of an SMSF”. When the proceedings commenced, the Friggers sought an order “pursuant to s 78 of the Trustees Act 1962 (WA) that the Perth property and the Armadale property vest in Mr and Mrs Frigger in their capacity as trustees of the superannuation fund”.
This 2016 case appears merely to have been an intermediary decision deciding an application on whether to restrain a certain law firm from acting (which, by the way, was unsuccessful). Presumably more cases will follow!
The lessons
Again, it is important to use a company as a trustee of an SMSF, and more importantly a company that acts solely as the trustee of an SMSF (and acts in no other capacity). The ATO confirms this on its website.
The easiest way to comply with the ownership 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 has not changed. Having a separate corporate trustee also reduces the chance of personal assets becoming intermingled with fund assets.
Remember, merely having a company as trustee of an SMSF is not enough. Rather, the company must also act only in that capacity. If the company acts in another capacity, it is quite possible that due to the activities of the company in its other capacity, creditors could claim fund assets.
This is probably a good point at which to also mention the penalty regime. By this stage, I’m sure I’m surprising no one in stating that SMSFs with companies as trustees face lower penalties from the ATO if something goes wrong. The table replicates what the ATO states on its website.
The penalties
Individual trustees
If super laws are breached, administrative penalties are levied on each trustee.
For example, for failing to prepare financial accounts and statements, each trustee would be liable for a $1,800 penalty (10 penalty units), which would amount to $7,200 if there were four trustees.
The value of a penalty unit is $180.
Corporate trustee
If super laws are breached, administrative penalties are levied on the corporate trustee.
For example, for failing to prepare financial accounts and statements, a corporate trustee would be liable for a $1,800 penalty (10 penalty units).
The value of a penalty unit is $180.
Now is probably also a good time to remind readers of regulation 4.09A(2)(a) of the Superannuation Industry (Supervision) Regulations 1994 (Cwlth). It provides that a trustee of a regulated superannuation fund that is an SMSF must keep the money and other assets of the fund separate from any money and assets that are held by the trustee personally. Naturally, 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 fund, 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.
AFSL considerations
Naturally, accountants need to be very mindful of Australian Financial Services Licence (AFSL) considerations. However, there is a joint statement from CPA Australia and Chartered Accountants Australia and New Zealand that an accountant (ie one who does not enter the AFSL “space”) can nevertheless make recommendations regarding a corporate trustee versus individual trustees for an SMSF, since discussing the benefits of an individual trustee versus a corporate trustee is not discussing a financial product.
There is a massive trend towards using individuals as trustees of SMSFs. This trend is evidenced by ATO statistics. Of the minority of SMSFs that have companies as trustee, it is unclear how many of them have companies that only act in that capacity. Again, to get maximum benefit from the corporate trustee structure, make sure the company acts solely as the trustee of the SMSF.
