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24 May 2018

Protecting assets in self-managed super funds


4 min

How $200k can be eroded from a director's retirement plan.

The first rule of corporate structures is to ensure that business dealings of the company are kept separate from personal financial affairs. For obvious reasons (or maybe not so obvious to those involved in the following case) and assuming the company has been responsibly managed, this will help to prevent directors risking their personal assets if things go bad.

We were appointed liquidators to a building contractor that incurred debts of some $400,000. Shortly after our appointment the company’s accountant, advised us that we had inadvertently frozen the director’s personal bank account and share trading account. Upon further investigation, we discovered that the accounts were in fact in the company’s name, however they were accounts held by the company as trustee of the director’s self-managed super fund (SMSF).

Protecting assets in self managed super funds

Upon inspection of the SMSF’s governing rules (i.e. the trust deed) we identified that it contained the usual ipso facto clause that automatically removes the SMSF’s trustee when the trustee is placed into liquidation. In any case, had the company not had this clause that automatically removed the trustee, it would have been automatically disqualified under the provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act).  Mind you, the SIS Act isn’t all that unfair as it provides a six-month grace period to appoint a new trustee where its former trustee is disqualified or otherwise unable to act in that role.

Given we were now holding, as bare trustee, bank account funds and a share portfolio worth almost $200,000, we sought to confirm whether the SMSF member (being the director) had appointed a new trustee.

Two years later, and many requests to the director and his advisor to provide us with these details, we are yet to resolve the SMSF’s position and continue to hold its assets as bare trustee.  Because of the time that has elapsed, and the poor advice taken—not only to structure the company in this manner, but the ongoing lack of information received—the following has occurred to the detriment of the director/SMSF’s member:

  • The SMSF has ceased being a regulated or complying super fund, which opens the assets to be subject to the Commissioner of Taxation issuing a civil or administrative penalty.

  • The members super fund balance will be diminished by the legal costs and liquidators’ costs incurred in dealing with the SMSF, which can be recovered under a right of indemnity.

  • If we cannot reach an agreement with the member or have the assets transferred to a new trustee, we may be required to apply to court for directions on how to appropriately deal with the SMSF’s assets, which will further diminish any available balance for the SMSF member.

Any qualified accountant or solicitor should be able to provide sound corporate structuring advice, but if you have recently taken on a new client with an existing corporate structure, it may be an opportune time to ask your clients about their corporate entities’ structure, including whether they are trustees of any SMSFs.

At the end of the day, corporate structures are there for a reason and while the moral of the story is not a new one, it’s certainly a critical reminder to your clients that the best way to protect their assets is to simply use common sense and “keep your corporate affairs separate from your personal financial affairs”.

For more information on how to protect assets or identify risks in the event of a formal insolvency appointment, download our complimentary ebook: click here.

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