A “trust” is an arrangement where a person (individual trustee) or a company (corporate trustee) holds assets in trust for the benefit of others (beneficiaries). An SMSF is a trust established and maintained for the sole purpose of providing retirement benefits for its beneficiaries. To create a trust, you need to have trustees, a trust deed, assets, and beneficiaries.
A “trust deed” is a legal document that sets out the rules of the SMSF such as its objectives, who can be a member, and how benefits are paid. There are various ways a trust deed can be prepared: engage a specialist lawyer and tailor a trust deed to your personal situation; purchase a trust deed or deed upgrade online; or use one provided by an SMSF Administrator. A trust deed needs to be signed and dated by all trustees and properly executed according to state or territory laws. It needs to be regularly reviewed and updated where necessary.
The trust deed and the superannuation law together form the SMSF’s governing rules. One of the most fundamental duties of an SMSF trustee is to obey the rules of their trust. This means, if the SMSF trustee is permitted under the Superannuation Law to undertake a particular action, they are not necessarily able to do so unless the action is also permitted by their SMSF’s Trust Deed. Therefore, it is most important to ensure that the Trust Deed remains current and that the SMSF Trustee has the authority under their Trust Deed to act to the extent permitted by the Superannuation Law.
I have come across situations where trustee actions have not been permitted due to an outdated trust deed. These actions include: commencing a pension of a type no longer permitted; the wrong beneficiaries receiving death benefits because of invalid documentation; entering into a borrowing arrangement without the required authority; unauthorised contribution splitting; and, not removing insurance covers which have conditions that are out of date.
Superannuation Law changes
Legislation passed in 2017, required changes to SMSF trust deeds to allow for:
- the ability to internally rollback retirement pensions to the accumulation account
- segregating assets between accumulation and pension phases
- allowing refunds of certain contributions
- dealing with excess transfer balance tax and excess non-concessional contributions
- the provision for CGT relief
- the calculation of member balances across different superannuation funds
- the transition to retirement income stream becoming a retirement pension when the pensioner meets certain condition of release
- the ability to rollover a death benefit without losing its death benefit status
Updating SMSF trust deeds
SMSF trustees should speak to an adviser about arranging an update of their trust deed. The adviser may use a superannuation lawyer or may use a trust deed provider that offers a standard deed upgrade.
An SMSF member may require an immediate update to their trust deed when they are considering a strategy that may not be allowable in the existing deed. Updates may also be required where the member is considering commencing a pension. Members wishing to invest in unusual investments may also need to look at having their SMSF’s trust deed updated. What happens to a member’s benefits, after they die, may also require an update to the trust deed.
What happens if the trust deed is lost?
Without a trust deed, an SMSF trustee cannot say that they are abiding by the rules of their SMSF, as the terms of the SMSF cannot be verified. The trustee may also encounter difficulties in dealing with other parties who want to check or rely on specific powers in the trust deed (e.g. lenders for borrowing arrangements, SMSF auditors, Australian Taxation Office).
SMSF trustees should exhaust all efforts to find the original executed copy of the lost deed. Failing that they should try and locate an unexecuted copy of the deed by contacting their accountants, auditors, or financial planners who may have a copy; or, contacting the deed supplier to check whether they retained the original trust deed or an unexecuted copy.
If a template or an unexecuted copy of the trust deed is found, the trustee may then be able to execute documents confirming that the template or unexecuted copy reflects the current rules; or seek an order from the relevant Supreme Court that the template or unexecuted copy is to be taken as reflecting the current rules.
If an approach to the Supreme Court is not possible or practical, SMSF trustees may choose to arrange for a deed of variation to be executed. This approach may be more practical and cost effective especially where litigation is not anticipated.
SMSF members must be aware of the requirements of their SMSF’s trust deed. This is one of the keys to compliance with the superannuation law.
Monica Rule is an SMSF specialist and author. Her advice is general in nature and you should seek advice that relates to your specific circumstances before making any decisions. www.monicarule.com.au