With COVID-19 heightening the risk of bankruptcy and insolvency, SMSF professionals should be encouraging clients to move to sole purpose corporate trustees to help protect the assets in the super fund, warns a law firm.
Dual purpose corporate trustees placing SMSF assets at risk
While greater numbers of SMSFs are now establishing their fund with a corporate trustee structure, DBA Lawyers director Daniel Butler said some funds have corporate trustees that have dual purposes which places them at increased risk.
“Given what may happen in the near future [with the economy] where there could be more bankruptcies, liquidations and insolvencies, we suggest that SMSF clients consider getting a sole purpose corporate trustee,” Mr Butler said.
“A sole purpose corporate trustee has limited liability and its sole job is to hold the super fund assets.”
Mr Butler said that sometimes the corporate trustee for the super fund is also a “building company, or a trading company or the one running the pub”.
“The only real assets that are worth anything or that are liquid are the assets held by the company for the super fund as trustee for the SMSF. If that company goes down or those individuals who are also individual trustees of that fund go down in bankruptcy, you’d have to prove that those assets belonged to the fund,” he warned.
“That itself could be a real problem because, at that time, you don’t have control of those assets, they’ve been taken off your hands by the liquidators or the administrators.”
SMSF professionals, he said, should therefore be proactively looking at their client base and moving clients to sole purpose corporate trustees where they currently have a corporate trustee with dual roles.
Mr Butler said there have been a number of cases where this issue has arisen, including Raelene Vivian, suing in her capacity as the Deputy Commissioner of Taxation (Superannuation) v Fitzgeralds .
“In this case, the taxpayers had put a security over the super fund property for the business. When the business got into trouble, the super fund asset was taken by the bank under the security and the taxpayer was hit with penalties,” he said.
“It’s that practical aspect of the company also being the trading company [that creates issues]. Let’s say it’s a pub and we know pubs haven’t been coping well with COVID, and if that pub is in difficulty and it’s also got the role of trustee of the super fund, if it goes down, you will be dealing with liquidators and insolvency people running up huge costs.”
In these circumstances, Mr Butler said the SMSF members would need to prove that the assets of the fund and cash in the bank are owned by the super fund, which in itself could be costly.