Q: I (my wife & I) have had a self-managed super fund (SMSF) since 1996. As rules concerning super pensions etc have changed since the date of my deed, can we simply sign a current, new, trust deed to make it effective for our requirements, or do I need to amend the relevant clauses in the old deed?
A: Updating a trust deed is not the same thing as signing a new deed. The important distinction between updating or replacing a trust deed, and the implications of doing the wrong thing, are explained later in this response.
Before that question is answered, it is important to highlight that if a super fund’s trust deed has not been updated since 1996 (or even since 2006, or now even potentially since 2016), then your trust deed certainly will not reflect the current super rules. A lot has changed in super in the past 20 years. Some of the significant changes that have taken place in the past 20 years or so include:
- Introduction of $1.6 million transfer balance cap (see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap)
- Transition-to-retirement pensions, and since July 2017, the removal of the tax exemption on pension earnings (see SuperGuide article TRIPs: 10 important facts about transition-to-retirement pensions)
- Maximum age for making superannuation contributions increased to age 75 (see SuperGuide article Super contributions beyond the age of 75)
- Work test removed for super contributions made when under the age of 65 (see SuperGuide article What are the super and retirement rules for over-65s?)
- Dividing super in event of divorce (see SuperGuide article Divorce and superannuation: Who gets what?)
- Splitting super contributions with your spouse (see SuperGuide articles Contributing to your spouse’s super account (4 Q&As) and Super for beginners, part 7: Can I split my super benefits with my spouse?
- Tax-free super for over-60s (see SuperGuide article Tax-free super for over-60s, except for some)
- Introduction of interdependent relationships for death benefits (see SuperGuide article Superannuation death benefits: Beware the dastardly death tax, and retirement cap)
- Recognition of same-sex couples when dealing with super benefits (see SuperGuide article Same-sex couples: your super rights explained)
- Introduction of account-based pensions (see SuperGuide article SMSF pensions: How do I start one?)
Note: For a chronology of changes to superannuation and the Age Pension in Australia from 1900 until 2010, click here. For current super rules and changes since 2010 refer to this site, SuperGuide.com.au).
Deed of Variation
If you simply replace the existing deed with a new deed you are creating a new SMSF which can then potentially trigger the ‘disposal’ of all of the fund’s assets. If such an event occurs the fund could be subject to capital gains tax (and stamp duty costs if property is involved). In comparison, a Deed of Variation can, in effect, replace virtually all of the terms of an existing trust deed but it does not involve removing the existing trust deed and replacing it with a new deed.
A Deed of Variation is not the same thing as replacing the trust deed even though it has a similar effect for the purposes of updating a trust deed. I believe such an update requires legal expertise to ensure you vary the deed rather than replace the deed.
How do I update my SMSF trust deed?
You will need to chat to an adviser/accountant/administrator about arranging an update of your trust deed. Your adviser, if you have one, may use a lawyer who knows a lot about superannuation or may use one of the many trust deed providers that offer a standard deed upgrade, which can then be updated regularly in a standardised way. A deed upgrade usually costs upwards of $550, although future updates on that upgraded trust deed may then cost you about $110 a year.
Standard annual updates are usually recommended (but not always necessary) by deed providers for prudence, although periodic updates reflecting super changes over time are essential. What matters when considering trust deed updates is ensuring that the trust deed governing your fund gives the trustees the power to accept contributions, invest super monies in accordance with the fund’s investment strategy, and enables the trustees to pay pensions in accordance with the rules and in a form that meets member’s needs.
An immediate update may also be necessary where a member is considering a strategy that may not be catered for in the existing deed, notwithstanding any relatively recent updates to the trust deed. The need for a deed update is likely to arise where a SMSF member is considering taking a pension, or planning to invest in unusual and/or high-risk investments, or planning for what happens to his or her benefits after he or she dies.
Can you recommend a deed update service?
There are quite a few trust deed providers and administrators who provide a Deed of Variation service, which, as I explain earlier, in effect replaces all the terms of the deed but not the deed itself. Make it clear when you’re conducting your enquiries that you’re seeking to update your deed rather than establish a new deed because the process is different, although the result is similar because the practical effect is that you will be using a standard-style deed that can be updated using standard updates from your provider. Again, shop around on how regularly a provider updates the trust deed. For example, it may be updated once a year for the cost of around $110 a year, although the initial update may cost a few hundred dollars.
I am not permitted to recommend a particular provider but you can find a starting list for your search by typing ‘smsf trust deed updates’ or something similar into Google, Yahoo or Bing. Again, the best place to start is your SMSF adviser (accountant/financial adviser/administrator), if you have one.