Does A Declaration of Trust Satisfy r4.09A?

Shelley Banton
Shelley Banton
June 11, 2024

While separation of assets remains one of the most reported contraventions by SMSF auditors, the question is: does a declaration of trust satisfy the requirements of r4.09A SISR?

It is a complex matter that demands examination from many different perspectives, resulting in the typical “it depends” answer.

One might think that a declaration of trust is a get-out-of-jail-free card for making a mistake when registering title to an asset, but it is not that simple.

Like anything to do with SMSFs, there are many moving parts to consider, not least of which is understanding how trust law interacts with the SIS rules and regulations.

The other issue is the many state and territory laws imposing different conditions for stamp duty, registration and document requirements.

SIS Requirements

Regulation 4.09A SISR is an operating standard that obligates SMSF trustees to keep money and other assets separate from any held by the trustee personally or from a standard employer-sponsor of the fund.

Regardless of whether the fund’s trust deed contains this covenant, s52 SIS determines that the governing rules contain it.

SMSF assets cannot be held in the personal name of the member or trustee, regardless of whether the trustee is an individual or a director of a corporate trustee.

Part of the requirement is to protect fund assets by establishing clear ownership in the event of a dispute to avoid costly litigation.

ATO ID 2014/7 also clarifies that the principles of r4.09A SISR apply to all types of assets, including shares, units in a trust and other property.

Without clear title, the audit report may be qualified, and an auditor contravention report (“ACR”) lodged with the ATO.

Trust Law Requirements

A trustee must be legally capable of holding SMSF assets in their own right and for the benefit of the beneficiaries.

A duty of care applies to trustees in the management of trustee affairs on behalf of beneficiaries. They have obligations regarding the protection of member benefits and must be able to prove they are the legal owners of the assets.

The trustee’s overarching principle is to protect the interests of the beneficiaries, so where an asset is not held in the current name of the trustee, it is a breach of trust.

While this is not a reportable SIS compliance breach, other repercussions, such as litigation from beneficiaries whose interests were not protected, can arise.

Stamp Duty on Property Transfers

Stamp duty exemptions may apply to property transfers without a change to the beneficial owner. Paying out an LRBA is a typical example where the trustee’s name is changed, but the beneficial owner – the SMSF – remains the same.

While there is no requirement to change the bare trustee to the SMSF trustee under these circumstances, a cautionary red flag exists where these transfers occur.

The reason is that while a nominal fee may apply in some jurisdictions if the trustee completes the correct paperwork in line with the specific instructions of the Office of State Revenue (“OSR”), there is no guarantee.

Getting it wrong, however, can result in full stamp duty applying.

On the other hand, some states and territories require the title to be held in the name of the SMSF trustee only.

What happens when an SMSF has a multi-purpose corporate trustee and the title is transferred over to the same trustee but with a different beneficial owner?

Firstly, the trust deed must allow the trustees to transfer assets through in-specie transfers.

It is a dutiable event because the beneficial owner is changing. The trustees must lodge the paperwork with the relevant OSR and pay the correct stamp duty.

Incorrect Legal Title

The ATO gives very little away when it discusses why assets are not in the correct legal title of the SMSF.

It provides few exceptions, the most notable due to an unavoidable restriction such as state or territory law.

Where this happens, ownership must be established by “executing a caveat, or creating an instrument or declaration of trust to enable the fund to assert its ownership”.

In real terms, very few reasons will justify why the title is incorrect.

When a trustee makes the mistake of not putting the trustee as the legal owner, trying to fix the issue can trigger bigger problems.  

Declaration of Trust

A declaration of trust is a legally binding document made before an asset is purchased, not afterwards.

Where it is put in place for property purchases, for example, it must be registered in some states and territories to be effective.

It is best to check the rules in each state and territory because it can trigger double stamp duty if drawn up after the property is purchased.

Acknowledgment of Trust

An acknowledgement of trust was previously the preferred document choice to prove ownership after an asset was purchased, but recent changes to NSW and Victorian state laws may now be a barrier.

Legislative change in these states shows that making a statement akin to a declaration or acknowledgement of trust where the dutiable property is held (or to be held) on trust for identified beneficiaries may be liable to duty, even if made orally or in writing.

As a result, requests for an acknowledgment of trust may result in unintended financial consequences, and trustees should seek legal advice in their respective jurisdictions before putting in place any such documentation.

Related Party Bare Trust

Using a related-party bare trust to address problems with asset ownership can result in further compliance contraventions.

The carve-out in s71.8 and s71.9 SIS says that an asset held under a bare trust is not an in-house asset if a limited recourse borrowing agreement (LRBA) is in place that meets all the requirements under s67A SIS.

Unfortunately, where no LRBA has ever existed, it is a breach of s71, and the investment becomes an in-house asset of the fund.

The situation perfectly sums up where trying to resolve a potential compliance breach only creates a worse one.

Conclusion

A declaration of trust, or an acknowledgement of trust, is helpful where the trustee cannot legitimately hold an asset on trust for the fund.

Further complications with changing OSR laws in various jurisdictions have effectively made drawing up either of these documents extremely expensive, as potential stamp duty issues arise if done incorrectly.

SMSF practitioners should be extremely cautious about requesting these particular documents from trustees who may require legal help to avoid red tape and unnecessary costs.

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