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Protecting your SMSF assets

Jul 16, 2021, 14:58 PM
By Graeme Colley
Executive Manager, SMSF Technical & Private Wealth

The strengths of having an SMSF provide people with ability to control and manage their  superannuation benefits, utilise estate planning benefits and access potential cost savings in addition to other advantages.  People often forget that SMSFs can be a vital linchpin in securing  the fund’s assets from threat.  This can be achieved by protecting assets from a member’s creditors in difficult times, allow the efficient transfer of assets between generations and retain assets so they can be paid as pensions. 

Your role as trustee

Because SMSFs are trusts the assets are owned by (vested in) the trustees.  Trustees may be individuals or a director of the corporate trustee, however, SMSFs do require trustees to be fund members.  Trustees are responsible for the whole fund jointly and severally which means they are required to look after all the member’s interests and not just their own.  As part of this role, trustees  are required to protect the fund from being pursued by a member’s personal creditors or hostile  beneficiaries such as family members who are staking their claim for a share of the member’s balance.

Asset protection

Asset protection can be described as the use of legal strategies to insulate a person’s wealth or certain assets from being challenged by those who may have a doubtful claim.  An SMSF is able to protect the assets that support a member’s benefit in a trust structure so that benefits will be paid to those who are entitled in terms of the fund’s trust deed.

SMSFs could be regarded as a shell for asset protection which keeps assets safe from legal action in a tax concessional environment.  The fund’s trust deed can give the trustee complete control when distributing assets during retirement or after the death of a member.  This advantage may not be available in other types of superannuation fund types or structures such as family trusts or companies.

Business assets

It is permissible for an SMSF to acquire, by purchase or transfer, a business premises out of which members may operate their business.  The fund will lease the business premises at commercial rates back to the business structure which may be a sole trader, partnership, trust or company. 

The main advantage is that superannuation contributions can be made for the fund members but the rent paid to the superannuation fund by the business helps increase the value of the fund.  As the fund is the owner of the business property it will be protected from any business creditors.

Also, by retaining the business property in the fund as family members join or leave the fund, future generations may be able to benefit from the continued lease of the property and its associated tax advantage without having to transfer it to family members, trusts or companies.  In these cases careful planning may be required to ensure the business assets remain protected.

Advantages of asset protection

• Keeps business premises safe from creditors if the business is sued or becomes bankrupt.
• Allows the fund to lease the business premises at commercial rates to the family business.
• Helps build the member’s benefits in the superannuation fund by the rent received from the family business in addition to any employer and member contributions.

Insuring fund assets 

An SMSF has two types of assets which can be insured – the fund investments and the fund members.

The assets of the fund, such as real estate, can be insured against fire and damage, landlord insurance and public liability.  This is an important consideration as insurance helps protect the value of fund assets so they are reinstated to their original condition.  There have been a number of court cases where significant compensation has been awarded where a worker was killed when repairing a building and the trustee of the superannuation fund was held liable for negligence.  Unfortunately, the superannuation fund did not hold insurance in respect of the building or public liability.

The other important ‘asset’ of a superannuation fund is the insurance that fund members and trustees are required to consider  as part of the investment strategy. .  The types of insurance that can be provided for a fund member include insurance for a person’s death, terminal illness, total and permanent disability and temporary disability, such as salary continuance insurance.

The fund’s investment strategy

All SMSFs are required to have an investment strategy which is a plan for making, holding and realising investments in line with the fund’s investment objectives.  The investment strategy can be used as a protection shield to support the trustees if they are ever challenged about whether the fund’s investments are appropriate in the member’s circumstances. 

For these reasons the investment strategy needs to be more than a mere statement of the types of investments the SMSF will invest in.  The ATO, as regulator of SMSFs, has saidoutlines that the investment strategy needs to explain the reasons for the fund adopting the particular investment strategy and how the fund will benefit.
An SMSF that has a very general investment strategy and has not considered the risks in making, holding and realising investments, as well as the likely returns, may have  a difficulty in complying  with the superannuation law.  A trustee needs to consider the fund’s investment objectives, any cash flow requirements as well as the members’ insurance requirements.

In any case, the law requires an annual review of the fund’s investment strategy. .

Estate planning

Superannuation is a subset of estate planning and involves developing strategies which deal with a person’s superannuation benefits after their death.  The payment of a person’s death benefits is controlled by the fund’s trust deed which may allow death benefits to be paid to dependants as lump sums, pensions or a combination.  

The trust deed may permit the member to direct the trustee to pay any pension to a reversionary beneficiary or they can direct the payment of benefits to dependants and/or their estate in a binding death benefit nomination.  These instructions ensure that the member’s superannuation benefits will be protected and paid to preferred recipients.  Where these directions are not made by the member, the trustee is usually able to pay the benefit as directed by the fund’s trust deed.

It is worthwhile to have a fund’s trust deed drafted so that any remaining fund trustees can’t override a member’s wishes after their passing.  One simple solution is to compel the trustee to appoint the member’s trusted executor as a replacement trustee to help protect the member’s  interests.

Anyone who thought that the role of a superannuation fund was to merely invest and ensure members or their dependants receive benefits may now need to think a little more broadly.  They also have responsibility to make sure the fund assets and the members are protected from unsuspecting marauders such as a member’s creditors or those wishing to make a claim on a deceased member’s benefit.

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