Can a SMSF use a Declaration of Trust when Property is in the Wrong Name?
Declarations of trust to fix a problem where the title of a property owned by a SMSF is registered with the Office of State Revenue in the wrong name or does not include the name of the SMSF should be avoided.
Example The trustees of the Smith Family Superannuation Fund are Betty Smith and Donald Smith. In NSW, and some other states, the land titles register does not recognise trusts and typically would show the legal owner of the property as “Betty Smith and Donald Smith as joint tenants”.
Typically, a declaration of trust was often used as evidence to support that Betty and Donald held the property on behalf of the Smith Family Superannuation Fund for the benefit of the members. However, a declaration of trust made after the purchase of a property can be subject to stamp duty which would be a very expensive error possibly resulting in double stamp duty.
SMSF trustees started using an acknowledgement of trust to fix this issue. However, recent changes to NSW and Victorian state legislation may trigger stamp duty which could result in significant financial consequences.
What is the difference between a “declaration of trust” and an “acknowledgement of trust”?
A declaration of trust is used to show a trustee’s intention to acquire a property on behalf of a SMSF at a future date. It is made prior to the purchase and establishes a relationship between the legal owner (the SMSF trustee) and the beneficial owners (members of the SMSF).
An acknowledgement of trust is merely a document to acknowledge there is a trust relationship between the legal owner and the beneficial owners after the purchase of the property.
Why is the Legal Title so Important?
Regulation 4.09A SISR (superannuation regulations) requires the trustees, regardless of whether the trustee is an individual or a director of a corporate trustee, to keep the assets and money of the SMSF separate from any assets or money held by the trustees/directors personally.
This can be problematic in the situation in our example above when the title cannot be registered to show that it is held in trust for a SMSF and when a trustee has inadvertently registered an asset in their own name and not in the name of a corporate trustee.
The SMSF auditor requires clear title to support the SMSF trustee legally owns the property on behalf of the SMSF.
Trust law also needs to be considered carefully. The trustees are required to protect the interest of the fund members and must be able to prove they legally own the assets. Litigation from SMSF members or their beneficiaries can be an issue especially in family disputes or on the death of a member.
Stamp duty exemptions may apply when property is transferred without changing the beneficial owners. Changing individual trustees to a corporate trustee is often one of these situations or paying out a limited recourse borrowing arrangement as the underlying beneficial owners are the members of the SMSF which do not change.
What can a Trustee do if the Property is in the Incorrect Title?
In most cases the title can be transferred into the correct legal title with minimal or no stamp duty where there is no change to the beneficial owners. The transfer of the title should be done through a conveyancer or solicitor to ensure the transfer and registration of the title is done correctly.
Having a sole purpose corporate trustee is very useful as it can only act as the trustee of your SMSF which provides evidence of clear title for audit purposes. This is one of many reasons Corporate Trustees are the best way to go.
The title of SMSF property, such as foreign property, or when restrictive state or territory laws mean the property title cannot be held in the SMSF’s name the ATO have said that ownership may be clearly established by “executing a caveat or creating an instrument or declaration of trust to enable the fund to assert its ownership”. However, please seek legal advice to ensure there are no stamp duty issues.