Deeds - Purchase & Upgrades
SMSF Structure
A trust deed is an essential document for all Self-Managed Superannuation Funds yet a trust deed’s importance, for majority of clients is not treated with any seriousness.
Without exaggeration, a good quality trust deed is critical to any SMSF.
Most SMSF deeds will contain two clauses.
- One which effectively puts all the various super laws into the trust deed.
- The second requires the trustees to do everything they reasonably can to ensure the fund does not lose its tax concessions.
These catch-all-clauses merely stops you doing something contrary to the law. It will not put flexibility into the trust deed. If it is not in the deed then you might not be able to do something that the law allows.
Changes to the Trust Deed
From time to time, there is a need to update a trust deed. A choice has to be made between changing the whole deed or only adding, deleting or amending part of an existing deed. It would cost more to make small changes to a trust deed than if you upgraded the full deed. You should also get a much better result because all the changes in the law should be included in the new deed. As a result, either all of the deed should be replaced or none of it should be replaced.
It is very common to see many older SMSFs with trust deeds that are 10 or more years old. In the last 10 years there has been an enormous change in the super regulatory environment. Also in that time there has been a big increase in our level of knowledge about the super rules. None of this would be reflected in an old trust deed.
SMSFs are a special type of super fund and are different to larger super funds in almost every respect. This means that the trust deed itself should be drafted specifically for SMSFs.
So how does a trustee know if their trust deed is a good one or not?
A good place to start is to read the trust deed to see what it says. This can be hard work but it can also be very fruitful. If a trustee is inexperienced they it might need to seek the services of a SMSF professional to guide them to a trust deed that will satisfy their circumstances.
SMSF Trustee
All regulated superannuation funds must have a trustee. Trustees are solely responsible for ensuring the fund is properly managed and that it complies with the SIS Act and other legal obligations.
For a fund to be a self managed superannuation fund, generally all fund members must have consented in writing to their appointment as a trustee of the fund. There are some exceptions, including where a member does not have the capacity to be an active trustee.
Also, there are limited circumstances where a trustee will not be a member of the fund, such as a single member fund with individual trustees. A single member fund cannot have a single individual trustee but it can have a single director corporate trustee.
A self managed superannuation fund will have either a corporate trustee or individual trustees. A corporate trustee is subject to the Corporations Act 2001. Individual trustees are subject to regulation by the Commonwealth through the pension powers within the Constitution.
A fund that has a corporate trustee may pay benefits in the form of a lump sum or a pension. A fund that has individual trustees must state in the trust deed that the fund was established for the sole or primary purpose of providing old aged pensions. However this does not prevent the fund from paying lump sum benefits providing the trust deed allows for this.
We believe that the best practice is to have a separate Special Purpose Corporate Trustee. We feel that a special purpose SMSF corporate trustee that is solely focused on running the fund is vital for the following reasons:
Advantages of a Special Purpose SMSF Corporate Trustee
Administrator control of the fund - If the company is put into administration due to the failure of the business operations the SMSF is tied up as the administrators are unlikely to do anything with the SMSF while the business is in administration. If the company is liquidated the position is worse. If a member dies or becomes incapacitated at this time, the administrator or liquidator will have control of how death and incapacity payments are made.
Administrator control of the fund - The current constitution of the company is set up for a business and not a SMSF. In short this means that the constitution ensures that the Board of Directors are focused and responsible for running a business rather than acting as a trustee of a SMSF.
Separation of Assets, Income and Accounts - Section 52 of the SIS Act 1993 requires a separation of the assets of the SMSF from those of the member’s or a related party. Having a dual purpose trustee may inadvertently result in the trustee accessing superannuation assets and member benefits for business purposes or booking SMSF income into the business accounts. Small errors can have lasting financial impact on the fund if it is made non-complying.