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All self-managed superannuation funds (SMSFs) are required by law to have a trust deed. This is your fund’s most important legal document. It sets out the rules governing your fund – what your SMSF can and can’t do – including your all-important investment strategy.
Many administrators and trust deed providers offer basic trust deed templates for SMSFs, which may be appropriate for some funds. But no matter how low touch your SMSF, you must ensure your trust deed facilitates everything you want and need your fund to be able to do. It may also need to adapt to the changing needs of members over time.
Some older trust deeds may not allow international investments, for example, or crypto currency, artworks and collectables or even exchange traded funds (ETFs). A trust deed should explicitly state which kinds of investments are allowed in the fund.
It should also never be a set-and-forget document. It should be reviewed at least annually and whenever there is major legislative change or a change in members’ circumstances.
The beginning of a new financial year is a perfect time to conduct a health check of your trust deed, as you gather information for your fund’s annual report. So here’s a checklist of the main areas you should consider reviewing.
People’s needs and circumstances change all the time. When you and your fellow trustees look at the asset allocation of your fund you may decide to consider the addition of international equities or real estate investments, for example, this financial year.
Before you do, make sure your trust deed permits it. Old trust deeds may not allow for international investments or other kinds of less common investments.
Even more recent basic trust deeds may not allow for an investment in real property or a limited recourse loan to purchase it, so the deed will need to be updated if you decide to invest in property either directly or indirectly via a private company or trust.
If your fund has members approaching retirement, you will want to make sure the trust deed allows for the appropriate pensions those members wish to take. Here are some points to keep in mind:
- Does your deed allow for members to start a pension before they retire, or a transition-to-retirement pension? Some old deeds may not allow this and will need to be updated.
- Some old deeds may not allow account-based pensions and will also need to be updated.
- Trust deeds may need to be revised for the transfer balance cap regulations – which cap the amount a retiree can use to support a pension – as these regulations now limit members’ abilities to commence new and additional pensions.
- The deed may also need a simple revision of what the increased transfer balance cap is, and include how it is now calculated, as trust deeds need to allow for what happens if a transfer balance cap is exceeded and funds are rolled back into accumulation phase.
- As the 50% reduction in minimum pension payments has been extended for the 2022–23 financial year, you need to ensure your trust deed has the flexibility to pay reduced pension payments.
- If your fund will have members in both accumulation and retirement phases – and will need to calculate exempt current pension income – the trust deed need may need to allow for the segregation of assets.
Even if you have a tailored trust deed, it’s difficult to allow for all circumstances of all members across their working and retired lives when you set up your fund. People’s situations change, which is why it’s important to review your fund and all documents associated with it on a regular basis.
3. Estate planning
A trust deed sets out what happens to a member’s benefits on their death. If a member wishes for their pension to be passed on to their dependants as a pension and not a lump sum, the trust deed needs to allow for pension reversionary benefits.
It’s also generally recommended each member states their wishes for their death benefits in a binding death benefit nomination. This is separate to the trust deed and provides more certainty that your final wishes will be carried out in the way you intended. However, a trust deed needs to allow for binding death benefit nominations. It also helps if it states that a trustee will follow the intentions of any member’s binding nominations.
A universal clause that has a provision incorporating changes to legislation impacting the governing rules of the fund can be very helpful, for example, when new types of pensions are legislated.
Trust deeds also need to allow for what happens when members exceed their annual contribution caps. Are the excess contributions automatically rejected, or accepted with the knowledge the member will pay any additional tax?
The trust deed must also outline procedures for the removal and replacement of trustees and directors of corporate trustees in all situations. For example, and hopefully this never happens to you, does your trust deed cover the replacement of a director of the corporate trustee if they become legally incompetent? In additions, some deeds may require a member’s resolution to remove a trustee. This can be difficult where there is a divorce or the only member of the fund has died.
How to change your deed?
A trust deed must also allow for variations and amendments. A deed of variation can be used for minor updates, but comprehensive changes may need a new deed, which will obviously come at a cost.
A deed of variation or amendment needs to detail the changes, spelling out that the original deed remains unaffected, except as varied by the deed of variation. It also needs to be signed and witnessed by the members. It is then attached to the original deed and becomes part of the SMSF’s trust deed.
As the trust deed is a legal document, the Australian Taxation Office (ATO) stipulates that an SMSF trust deed must be written by someone who is competent to do so. This doesn’t automatically rule out writing your own deed or deed of variation, but it does mean you need to be confident that what you are writing would stand up when tested by a third party in a legal setting.
Your trust deed is a legal document and as such it’s important you know where it is at all times and that all members have a copy. You might consider leaving the original with your accountant or legal adviser for safekeeping.
If you don’t review it regularly, and your SMSF ends up making an investment in an asset not allowed by the deed or starts a pension not permitted by the deed, you could leave your SMSF open to expensive fines or even being made non-compliant by the ATO.