SMSF trust deed health check for 2021–22

A trust deed should never be a set-and-forget document and should be reviewed at least annually and whenever there is major legislative change or a change in members’ circumstances.

Given the recent increases in the transfer balance caps and the contribution caps, and also that a new financial year is upon us, now is the perfect time to conduct a health check of your trust deed.

Here’s a checklist of the main areas to review.

1. Investments

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 that international equities, cryptocurrency or real estate are investments you want to consider this financial year.

• But 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 through which to purchase it, so will need to be updated if you decide to invest in property either directly or indirectly via a private company or trust.

2. Pensions

If your fund has members approaching retirement for the first time, you will want to make sure the trust deed allows for the appropriate pensions that members are likely to take.

• 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 2021–22 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 needs to allow for the segregation of assets.

Even if you have a tailored trust deed, it is 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 and needs to allow for pension reversionary benefits if a member wishes for their pension to be passed on to their dependants as a pension and not a lump sum. For more information see SuperGuide article Estate planning and SMSFs: What it is and why it matters.
• It is best for each member to state 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 and it also helps if it states that a trustee will follow the intentions of any member’s binding death nominations.

4. General

• A universal clause that has a provision incorporating changes to the legislation into the governing rules of the fund can be very helpful, for example, when new types of pensions are legislated.
• From the 2020–21 financial year superannuation contribution caps have been increased but 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 needs to outline procedures for the removal and replacement of trustees and directors of corporate trustees in all situations. For example, executive manager, SMSF technical and private wealth at SuperConcepts, Graeme Colley, is familiar with one situation that did not cover the replacement of a director of the corporate trustee where they had become legally incompetent. Another deed required a member’s resolution to remove a trustee, which can be difficult where there is a divorce or the only member of the fund has died.

How to change it?

A trust deed also needs to allow for variations and amendments. Most small variations and changes should only need a deed of variation or amendment 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.

The Australian Taxation Office (ATO) stipulates that an SMSF trust deed must be written by someone who is competent to do so, as it’s a legal document. 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.

The bottom line

Your trust deed is a legal document and as such it’s very important that you know where it is at all times and that all members have a copy. Leaving the original with your accountant or legal adviser who drafted it is probably the safest option.

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 also not permitted by the deed, you could leave your SMSF open to very expensive fines or even being made non-compliant by the ATO.