He explained that compliance documents are those between two or more related parties and are designed to show that the parties have bound themselves to matters required by law.

“They are prima facie evidence of compliance with the law. They provide the necessary support for the parties to assert the lawfulness of their actions, despite the fact that they may appear somewhat artificial because of the relation between the parties that in SMSF are often the same – members who are also trustees,” he said.

“As the fund bears the onus of proving compliance the inability to do so by producing the relevant documents can mean the removal of the complying status for the fund and the resultant assessment of eye-watering amounts of additional tax.”

He said it is unfortunate that trustees often treat compliance documents with “casual disregard” and don’t create or execute them when they should.

“For example, they don’t date them when they execute them, they don’t check them to ensure they perform them correctly and they don’t even keep them where they can find them,” he said.

“Additionally, trustees can lose these documents either accidentally, or even destroy them, and then they break into a cold sweat when the ATO demands to see them.”

Hallinan gave an example of a fund that decided to refinance a direct property investment it made using a limited recourse borrowing arrangement.

The new lender to the fund, who was happy to refinance the existing loan, asked for a certified copy of the original deed setting up the super fund, but it was unable to be found.

“The client assumed it was with the accountant who didn’t set up the fund in the first place, and who in turn assumed it was with the client or the previous accountant. Curiously, given their role, the auditor had never seen it,” he said.

Hallinan continued that the deed can be created ratifying the original execution of the establishment deed, but there needs to be evidence to support such ratification.

“The trustees could use as evidence a copy of the original deed but they can’t find that either. Someone suggests they use a blank copy of the deed. They think the fund was purchased for the setup,” he said.

“Not only will no lawyer or JP certify such a blank as a copy of the original given they’ve never seen the original, but even the courts, who have in past cases expressed their general desire to help, would be struggling to make a link with the original in the absence of something more.”

The ultimate solution to these problems is an application to the court at great expense and delay, Hallinan said.

“Deeds of ratification can be prepared and some lenders are happy to accept them on the grounds of commercial expedience. The ATO may not, but the undeniable fact is that all those associated with the fund should not undervalue compliance documents just because there is no third party involved,” he said.

“Nor should the trustees of the fund blindly rely on their accountant to keep the documents safe. Trustees need to check.”

Keeli Cambourne
October 23 2024
smsfadviser.com