The Trust Deed for an SMSF is the Fund’s most important document. It forms the core component of the Fund’s governing rules. Whilst legislation typically stipulates what trustees must not do, the governing rules of a Fund specify what trustees are allowed to do.
For example, the appointment of an Enduring Power of Attorney to stand in the shoes of an incapacitated trustee must be expressly permitted in the Fund’s governing rules. Merely having an Enduring Power of Attorney does not of itself mean that an Enduring Power of Attorney is appointed upon a trustee losing mental capacity. The Fund’s governing rules must provide the mechanism for the removal of a trustee that has lost mental capacity.
Therefore, if the Fund’s governing rules do not expressly allow for this to occur, the appointment of the incapacitated trustee can have serious ramifications for the Fund’s qualification as a complying superannuation fund. Superannuation regulations do not state a Legal Personal Representative (LPR) is automatically appointed if a trustee loses mental capacity. If not correctly documented in the Trust Deed, the Fund may not be able to be restructured to remove the incapacitated trustee. This may render the Fund inoperative, as all trustees must actively make decisions regarding the Fund (including the removal of a trustee).
The requirement for updating your SMSF Trust Deed can come from many sources:
Changes in legislation
Some of the more prominent recent changes in superannuation legislation are:
- Refund of excess concessional contributions
- Limited Recourse Borrowing Arrangements
- Remuneration of trustees
- Covenants to be included in the Fund’s governing rules
- Requirement to report assets at market value
- Requirement for the trustees to consider insurance for members.
Court cases and decisions
Recent court cases such as Ioppolo & Hesford (as executors of the estate of the late Francesca Conti) v Conti & Anor  WASC 389 and Wooster v Morris  VSC 594 outline the importance of sound estate planning practices, such as Binding Death Benefit Nominations (BDBN). An SMSF member is not automatically granted a BDBN; the Fund’s governing rules must allow for such direction to the trustee (this may include a non-lapsing BDBN). With regard to death benefit payments, the Fund’s governing rules are crucial in determining who will run the Fund once a member has passed away.
Change of member circumstances
Changes in personal circumstances may also warrant a review of the Trust Deed to see if it is up-to-date. For example, a member may look to go from accumulation phase to Transition to Retirement (TTR) pension phase. If the Fund’s Trust Deed is an older deed, it may only allow for a pension to commence once the member has retired. Again, there is nothing in the legislation that states a particular Fund can commence a TTR for a member.
Relying on deeming clauses in the Trust Deed will not provide the ability for the Fund to pay such a pension because the legislation only defines a TTR and outlines the payment rules for such an income stream, but there is no mention of a Fund’s ability to pay such a pension. Unless the Fund’s governing rules expressly allow for a TTR, then it is likely the Fund may breach its governing rules if it pays a TTR income stream.
Requirements by third parties
It may be prudent (or a requirement) to update the Trust Deed if the trustees are looking to undertake a specific investment. For example, a bank may require a Deed to expressly allow for Limited Recourse Borrowing Arrangements before it provides finance to the SMSF, or it may be necessary to upgrade the Fund’s governing rules to undertake a derivatives transaction.
Don’t rely on an old Trust Deed
Without an up-to-date Trust Deed, the trustee may not be able to operate in a way that it wishes without being in breach of trust. Beneficiaries may also take action against trustees for losses or damage (for example, if a particular strategy needs to be unwound). Beneficiaries are not limited to seeking recompense from trustees under this section, but also third parties such as accountants and financial planners.
How often should your SMSF Trust Deed be upgraded? It is prudent to upgrade the Deed regularly by using an online updating service. This type of proactive service ensures a Fund’s governing rules are current, as well as providing accountants and advisers with comfort that all their clients’ Deeds are the same, making it much easier to administer the funds and advise trustees. SMSF auditors are also required by the Audit Standards to determine whether the trustees are acting in accordance with the Fund’s governing rules.
Nicholas Ali is Head of Technical Services & Education at SuperIQ and Super Concepts. This article is for educational purposes only and does not address the needs of any individual. It is believed to be accurate at the time of writing but rules or interpretations may change.