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Campbell McCart

Mar 15, 2021

To Contravene or Not Contravene Separation of Assets

in SMSF Technical Forum

Background. In 2012 Lighting SMSF established with 2 members John Dark and Mabel Clear as individual trustees. In 2018 year fund converts from individual trustee to Corporate Trustee being Water Line Pty Ltd. My understanding is that all asset / investments of the fund should now be held in the name of Water Line Pty LTD ATF Lighting SMSF.

In 2020 year to be audited the fund is now worth $1,800,000. It has 3 term deposits totalling $900,000 held in the name of Lighting SMSF. It has 8 shares worth $34,000 held in the name of John Dark and Mabel Clear ATF Lighting SMSF. When considering separation of assets S.52B(2)(d) and r4.09A:

1. Would you contravene the term deposits?

2. Would you contravene the shares?

I would contravene both for the following reasons:

1. Term deposits no mention of any trustee, amount is sizeable to the fund.

2. Even though the shares, represent less than 5% of fund assets and may be considered not material. Trustees unlikely to take action if requested to in Management letter. Also who is to say that the shares in 2021 year do not grow to be $1,200,000 with the same incorrect ownership recorded.

I have raised this at previous auditor CPD and told to contravene. Your thoughts as I continually get negative feedback from Accountants / trustees.

3 comments

Comments (3)

THE AUDITORS INSTITUTE

Mar 18, 2021

Hi Campbell

I agree that the term deposits are not held in the way that the ATO expects them to be as per there example for a corporate trustee as noted above being "R Smith Pty Ltd as trustee for the Smith SMSF". However, Regulation 4.09A of SIS requires that assets are to be kept separate from:

a) money held by the trustee personally, or

b) money of a standard employer-sponsor or an associate (of an employer-sponsor).

That is as the term deposit is in the name of the Fund there is an argument that it is being kept separate from personal assets.

As noted above for the term deposit there should be a declaration of trust. You could also raise the issue in your management letter that the Term Deposit should refer to the trustee company as the owner in trust for the Fund.

I agree the recent Sydney "Ponzi" Scheme case highlights that we need to carefully review / audit the documentation that we are provided. It will be interesting to see how this Sydney cases play out if the auditor(s) relied on documentation that was fraudulently put together and did not verify any of the shareholdings in the portfolio reports provided.

Thanks

SMSF AAA