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Umesh Manek

Sep 01, 2022

Validity of Contact and Audit Approach

in SMSF Technical Forum

I am auditing the superfund, please find below the summary for easy reference:

Contract of Sale for the purchase of property signed by members in personal name on 24 June 2020.

Super fund established on 26 June 2020 (post contract of sale).

Deposit money paid by the members has been accounted for as NCC on 1 July 2020 by the superfund as super fund has lodged return not necessary for FY2020.

Bare Trust and Bare Trustee established on 14 October 2020.

Propety settleled on 17 February 2021 by Bare Trustee.

While we questioned the validity of the contract, Trustees advised that the nomination clause in the contract of sale allows Members to nominate anyone/substitue, in this case is Bare Trustee.

What should be our audit approach, considering the superfund and Bare Trustee were not in place when the contact of sale was executed ?

Will appreciate your guidance here.

4 answers0 replies

Comments (4)

Eric Taylor

Sep 14, 2022

I generally agree with the answer supplied. As the bare trust & trustee did not exist until October, it could not acquire the property in June. Subject to legal advice (and I am not a lawyer), the situation here may be the purchase by the individual in June, then sale to the bare trust in October. In addition to double stamp duty, the purchase of the property from an associate is a major issue.

Trustee needs to seek legal advice.

THE AUDITORS INSTITUTE

Sep 04, 2022

Hi Umesh

It is common to see Funds acquiring property in effect pre the Fund and pre the bare trust / bare trustee being established.

The rules re this issue are complicated and there are different rules in different states so the answer to your query will be based on what state the property was purchased in.

My preference is always that a lawyer signs off on any SMSF acquisition of property via a LRBA.

Given the Fund did not pay the deposit and it has been treated as a contribution you need to consider the stamp duty implications down the track if the property is transferred from the bare trustee to the Fund.

If you advise the state that the property was acquired and the date the deposit was paid I will obtain the view of a lawyer.

Thanks

SMSF AAA

Umesh Manek

Sep 05, 2022

Replying to

Thank you for your reply.

The deposit was paid on 26 June 2020 and property is in Victoria.

THE AUDITORS INSTITUTE

Sep 13, 2022

Replying to

Hi Umesh

As stated above my preference remains that a lawyer signs off on a SMSF acquisition of a property via a LRBA given the complexity of the rules and the different rules in each state / territory.

You note that the deposit was paid on 26 June 2020 and the property is in Victoria. You have noted that the Fund did not do an ITR in 2019/20 & that the deposit was treated as a NCC on 1 July 2020. My first query is why was the deposit not treated as a NCC on 26 June 2020 given that was the date the deposit was paid?

There is a risk that as the Fund has not paid the deposit from the Fund's bank account then there could be stamp duty payable again if the property is transferred from the custody trustee to the trustee of the Fund once the LRBA has been paid off. The Fund may need to prove to the stamp duty office at a later date that it fully paid all the purchase monies (including the deposit).

The lawyer I spoke to queried if the contract had a "and / or nominee" clause on the contract. Your query seems to show that there was such a clause. The lawyer raised that the Fund should have been established prior to the contract being signed and that as the property was in Victoria the bare trust / custodian company could be established after the contract date and prior to settlement.

The audit approach I would suggest is at a minimum to raise any concerns that you have in a management letter to the trustees. I would also request any legal / professional advice that was obtained in relation to the property purchase and compliance with the SIS rules re LRBA's.

An article from DBA Lawyers that provides guidance on trips and traps re LRBA's is below.

Thanks

SMSF AAA