When is an Acknowledgement of Trust used for an SMSF?
SIS r 4.09A requires SMSF assets to be kept separate from trustees’ personal assets, including those of corporate trustee directors. An SMSF must have clear title to assets it owns. If a fund mistakenly buys an asset in the wrong name, such as Jones Pty Ltd instead of Jones Pty Ltd ATF Fred Jones Super Fund an “acknowledgement of trust” is commonly used to comply with SIS. This differs from a “declaration of trust,” which is made before a purchase.
Hint – ATF – “As trustee for”
What is an acknowledgement of trust?
Assets such as property, shares, cash or any other assets are usually held legally and beneficially by the same person or entity. A trust is created when the legal and beneficial interests are separated. An acknowledgement of trust is an agreement as to who owns the beneficial interests.
As an example, the SMSF trustee may make a written declaration as follows:
Jones Pty Ltd ACN 101 202 303 purchased an investment property at 10 Newcastle Road, Newcastle NSW and the folio is Lot 1 in DP 12345. The property was purchased on the 10th May 2024. The property was purchased and held at all times for the benefit of the members of the Fred Jones SFD ABN 123 456 7899. The cash to pay for the property was directly transferred from the bank account held by the Fred Jones SFD. The trustee of the Fred Jones SFD is Jones Pty Ltd.
Stamp duty considerations
Stamp duty or transfer duty is taxed at the state and territory levels with each jurisdiction having its own specific legislation. It was generally accepted that ad valorem transfer duty did not apply to an acknowledgement of trust declaration as it did not affect a change to the beneficiary. However, changes made to state legislation in NSW and Victoria means that an acknowledgement of trust declaration made orally or written may be subject to transfer duty.
Before using an acknowledgement of trust to fix a mistake or record the ownership of an SMSF check the state legislation, or the declaration could trigger double transfer duty.
Will the ATO accept an acknowledgement of trust?
An SMSF auditor will look at the paperwork supporting the purchase of an SMSF asset to determine if the evidence reflects the legal ownership by the SMSF and beneficial ownership by the members of the SMSF.
The ATO like to see the asset title recorded as follows:
- Individual trustees – Fred and Mary Jones as trustee of Fred Jones SFD
- Corporate trustee – Jones Pty Ltd as trustee of Fred Jones SFD
The auditor review documents such as:
- purchase contract – to see if the contract states it is being purchased by the SMSF trustee ATF the SMSF
- bank statements or loan documents – source of funds is from the SMSF or borrowings in relation to a limited recourse borrowing arrangement (LRBA)
- declaration of trust – used for LRBAs and put in place prior to purchasing a property
- acknowledgement of trust
- title search to confirm the owner of a property
- confirmation of title from share registries
- statements from unrelated third parties i.e. public unlisted unit trusts or investment platforms
- a caveat executed on the title of SMSF property to establish beneficial ownership
When an SMSF cannot be directly shown “as trustee for” on a title
A fund does not breach r 4.09A in circumstances when the designation “ATF” for the fund is unable to be included in the title of an SMSF asset such as:
- property which cannot be registered in a state or territory with the designation “as trustee for Fred Jones SMSF” can be held in the title of the sole purpose corporate trustee without breaching r 4.09A.
- foreign property: In countries like the United States, direct property investment by an SMSF requires using a foreign company controlled by the investor. This company is considered a related party and must comply with 13.22C non-geared unit trust requirements to avoid breaching in-house asset rules. Some Asian countries allow only residents to acquire property. An SMSF member who is also a resident of the foreign country could possibly acquire the property, but advice should be sought to ensure the fund has ultimate ownership of the property and the residency rules under SIS continue to be met.
The auditor will examine documents, including those above, to verify the fund’s ownership. If “ATF” is missing from the title without a legal reason, the auditor may breach the fund.
When all of the individual SMSF trustees cannot be included on a title
An SMSF can have up to six members and generally, all members must also be a trustee. As an SMSF is a trust it is subject to the Trustee Act of the state or territory that has jurisdiction. Most states and territories only allow four individual trustees and therefore an SMSF with five or more members must have a corporate trustee. There are some circumstances when not all individual trustees can be included in the title of an SMSF asset. The fund will not fail r 4.09A in those circumstances but must provide other evidence of ownership.
- Share registries do not allow more than three individual trustees to be recorded on the title of listed equities.
- Banks often do not allow all individual trustees to be recorded in the title
- Contracts of sale do not allow six individual trustee names to be recorded
Hint – Having a sole purpose corporate trustee overcomes this issue as the shares can be held in the title of “Jones Pty Ltd <Fred Jones SMSF>” or simply as “Jones Pty Ltd”.
Acquiring assets in the name of a special purpose corporate trustee
When the sole purpose of a company is to act as trustee of the SMSF and not for any other purpose an SMSF asset can be in the title of the special purpose company without using the designation “ATF” for the fund. In addition, the constitution or rules of the special purpose corporate trustee must prohibit distribution of its income or property to its shareholders.