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SMSFs and schemes involving asset protection

Why we are concerned about self-managed super funds (SMSFs) entering into certain schemes involving asset protection.

Last updated 21 December 2022

Schemes we are concerned with

We are concerned about asset protection arrangements that claim to protect SMSF assets from creditors by mortgaging them to an asset protection trust, commonly referred to as a ‘Vestey Trust’.

A Vestey Trust is a discretionary trust established by deed. It is claimed that the trust is set up to acquire the equity in the SMSF’s assets through an equitable mortgage.

The equitable mortgage is supported by the execution of a promissory note by the SMSF to the Vestey Trust. This recognises a debt is owed by the SMSF to the Vestey Trust. The mortgage is also supported by a caveat by the Vestey Trust over the SMSF’s real property. The arrangement can also allow a transfer of the SMSF’s cash holdings to a bank account in the name of the Vestey Trust.

Why some asset protection schemes concern us

First, the arrangement is unnecessary because the super system already protects SMSF assets from creditors.

Second, the arrangement is a compliance risk and may contravene one or more super laws. For example, it may:

  • result in the giving of a ‘charge’ over, or in relation to, a fund asset by the SMSF trustee
  • involve the ‘borrowing’ of money by the SMSF trustee
  • expose fund assets to unnecessary risk if it’s not clear who owns them
  • cause the fund to be maintained in a way that doesn’t comply with the sole purpose test.

Finally, SMSF money cannot be used for costs related to asset protection arrangements entered into by members to protect their personal or business assets because these expenses are not incurred in running the SMSF.

If the arrangement contravenes the super laws, penalties may apply.

If trustees are involved in a scheme like this, they should make a voluntary disclosure. We will take this into account when determining our compliance action.