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A self-managed superannuation fund’s (SMSF’s) trust deed is one of its most important assets. While legislation sets out what trustees must not do, the trust deed specifies what a trustee is allowed to do. Now’s the time of year to perform the yearly review of the deed.
Experts say it can be the ‘make or break’ point in Australian Taxation Office (ATO) reviews or legal proceedings related to SMSFs. As such, trustees should ensure the deed’s terms are robust enough to stand up to potential challenges.
An exceptional deed is concise, clear and unambiguous when it comes to the fund operating in line with superannuation legislation. This is important as ultimately trustees want to run their fund with confidence it is up-to-date with superannuation reforms and so they can take advantage of strategic investment opportunities as they arise.
“The best trust deed is one that is drafted for the purpose of members, allowing members to do what they want with the fund and its assets. It sets out how assets will be invested and how benefits will be paid,” says Peter Hogan, the SMSF Association’s head of technical.
“Some deeds will be prescriptive about asset classes in which the fund can invest. So, the investment strategy and the trust deed should reflect any restriction in the asset classes in which the fund can invest,” he adds.
Many SMSF administrators and some accountants provide a template deed, and Hogan says for many people these documents may be adequate.
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“A ‘cookie cutter’ document is fine if it reflects the members’ circumstances. But some trust deed are so broad the trustees feel they can do almost anything, which can be unhelpful. Trustees want specific direction in relation to how they should deal with assets. So having a clear picture in the deed of what you want to achieve in retirement and how assets should be dealt with after the members’ death, as well as who can be a member of the fund, is important,” Hogan explains.
How often should reviews happen?
Super legislation changes constantly and it’s important to review the terms of the deed at least annually, paying particular attention to any changes in legislation.
“This avoids the risk associated with, and the complexity of, having to account for several years’ changes and running the risk of missing items relevant to your circumstances,” says Pete Pennicott, a director of financial advice firm Pekada.
Regular reviews are essential as out-of-date trust deeds can result in additional costs and audit consequences if minor transgressions come to light in any review and, potentially, ATO sanctions in extreme cases.
“Reviews should not be cumbersome if done regularly, and should be viewed as part of the annual hygiene check for your fund, which ensures the fund and its members operate in line with legislation,” Pennicott says.
It is important to understand that even if legislation allows trustees to take an action in relation to a fund, if the trust deed does not allow it, it cannot be done, says AMP financial planner Mark Borg.
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“Superannuation legislation has evolved over the years and it’s important your trust deed reflects any updates. Not updating the deed may mean that increased flexibilities provided by legislation are not available to members of the fund,” he adds.
Here are some essential areas for review.
Some members may be allowed to commence a pension before retiring and the deed should allow for this if members are legally able to go down this path.
“Older trust deeds typically did not allow for this. It is also worth noting that many older trust deeds refer to defined benefit pensions and these are no longer available,” says Borg.
Trustees are advised to check the SMSF’s deed to ensure it reflects current pension laws.
Estate planning rules continue to evolve and this also impacts trust deeds. “How and when reversionary beneficiaries come into effect has become increasingly important, especially in the light of Centrelink changes and changed contribution rules. Ensuring your trust deed reflects current rules will give trustees flexibility around this,” Borg adds.
This also holds true for binding death benefit nominations – older trust deeds may not allow for non-lapsing nominations. In a worst case scenario, an out-of-date deed may mean that in the event of a member’s death, funds don’t go to the people to which they were intended.
Reducing the risk of mistakes
One of the most common mistakes trustees make when it comes to trust deeds is putting it in a drawer once it’s written and never pulling it out again.
“Some trustees don’t read the document at all before investing the assets in the fund. Others don’t look after it. But it’s an extremely important document for the fund and trustees should know at all times where the original document is. They may not physically hold it, but the lawyer or accountant who drafted it should have the original. Trustees should also ensure all the fund’s advisers have a copy of it, so it cannot be argued advice was provided without knowing what the trust deed said,” says Hogan.
It’s a straightforward process to update a deed, he explains. “The simplest way to update a trust deed is with an amending deed. You don’t need to execute a new trust deed. This creates a new fund – it does not amend the trust deed of an existing fund.”
The amending deed should identify the name of the fund and state when it was established, and also include clauses that are to be repealed or replaced and substitute clauses.
Says Hogan: “This is a relatively cheap way to amend your trust deed and bring it up-to-date.”
Consequences of not changing your trust deed
Not having an up-to-date trust deed runs the risk of not being able to operate the fund and its strategies in line with superannuation laws. Additionally, an incorrect amendment could render other parts, or in some cases all, of the deed invalid.
“In many cases the impact of an out-of-date deed may only be additional work to bring it up to speed, and cost. But in extreme cases trustees could face significant fines, the fund being declared non-compliant or trustees being barred from being a trustee,” says Pennicott.
With 2019 still in its nascency, it’s not too late for trustees to review their SMSFs trust deed. The idea is to find it and review it to ensure it complies with current legislation and supports members’ retirement goals. That’s the best way to reduce the risk of non-compliance and penalties or fines down the track.
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