TAX Alert: Do SMSF deeds need to be amended?

Aug 30 2017

Publications

A common question recently is whether trust deeds of self managed superannuation funds (SMSFs) need to be amended following commencement of the new superannuation/tax regime on 1 July 2017.

Our answer is below.

Necessity to amend deeds

Most SMSF deeds do not need to be amended.  It is unlikely that failing to amend a deed would result in a breach of any particular tax or superannuation law for most funds.  Most deeds give the trustee the power to comply with relevant tax and superannuation law as it changes from time to time.  So, for example, it is unlikely that most deeds would need to be amended to provide the trustee with a power to comply with excess transfer balance determinations and commutation authorities under the new law.

Consider the client’s circumstances and read the deed

The difficulty is that a conclusive answer cannot be provided until the deed has been considered, in the context of the client’s particular circumstances.  So, for example, if a client is aged 40 and contributing to the SMSF and the trustee of the SMSF has no intention to borrow, it will not be relevant if the deed does not give the trustee a power to borrow or pay account based pensions.

However, if that same client wanted a binding death benefit nomination, and the deed only provided the trustee with a discretion to pay death benefits to dependants or the member’s legal personal representatives, the deed would have to be amended.  If the deed does not give the required power, it will be irrelevant that the member may have competed a binding death benefit nomination.

The complication with considering the client’s circumstances, reading the deed and considering how the deed relates to the client’s particular circumstances is that it will cost more to do that than to simply amend the deed.

Key areas where amendments may be prudent

In our experience based on reviewing many SMSF deeds, the key areas where amendments may be required include where the deed:

  • contains prescriptive rules that are not appropriate
  • does not deal adequately with death benefits
  • does not provide a power that is required
  • does not deal adequately with pensions
  • is so out of date that it is almost unreadable
  • could be enhanced to deal with the law from 1 July 2017.

Following are some examples based on our experience and our thoughts in relation to the law from 1 July 2017.

The deed contains prescriptive rules that are not appropriate

Examples of this include funds where the deed:

  • Contains notice or consent requirements, eg consent of a member or employer sponsor to certain decisions such as amendments or the exercise of certain powers, even though such consent is not required under the Superannuation Industry (Supervision) Act (SIS Act) or regulations under that Act. Employer sponsors being parties to deeds can create particular problems eg if the employer sponsor is wound up or sold, and the employer sponsor’s consent is required to a decision such as amending the deed.  In our view, deeds with employer sponsors as parties should often be amended to remove the employer sponsor.
  • Create mandatory accounts that are not used. Some deeds provide for the creation of specific accounts such as member contribution accounts and employer contribution accounts, and the crediting of contributions and income to the relevant accounts.  In our experience, these provisions are rarely complied with.  In our view, deeds should provide the trustee with the power to create such accounts as the trustee considers appropriate.

The deed does not deal adequately with death benefits

Examples of this include funds where the deed:

  • Does not allow for binding death benefit nominations where the member wishes to have a binding death benefit nomination.
  • Only allows for binding death benefit nominations with a limited life ie ‘lapsing’ nominations (eg 3 years in accordance with the law that applies to larger funds), when that is not necessary for SMSFs.
  • Provides the trustee with a discretion, but then provides that if the discretion is not exercised within a certain period after death (eg 6 months) the death benefit must be paid in a certain way (eg to the legal personal representatives of the deceased). There have been matters we have been involved in where such a provision has caused significant grief (eg the deceased had a non-binding death benefit nomination nominating certain persons, and the will provided benefits to other persons, but the trustee of the fund had not taken any action within the period required under the deed).
  • Does not deal with the conflict between the terms of a reversionary pension and a binding death benefit nomination eg where the member has a pension that automatically reverts to the member’s spouse, and a binding death benefit nomination providing that the death benefit must be paid to the member’s legal personal representatives. Of course, advisers should pick up on this inconsistency.  Nonetheless, we consider that deeds should provide that where there is an inconsistency, the terms of a reversionary pension should prevail.

The deed does not provide a power that is required

Examples of this include funds where the deed:

  • Does not provide the trustee with an express power to borrow, and the trustee wishes to enter into a limited recourse borrowing arrangement. A bank will often want to see a specific borrowing power, rather than something general (eg the power to do whatever is permitted under the SIS Act or the powers of a natural person unless prohibited by the SIS Act).  In fact, we’ve had matters where a bank has required a specific power to open a bank account, and would not accept a general power in a deed that provided the trustee with the powers of a natural person.
  • Is particularly old and does not allow a member’s superannuation to remain in the fund once the member satisfies a condition of release such as retirement or turning age 65.
  • Provides that a commuted pension must be paid out as a lump sum, and does not allow for a commuted pension to remain in the fund in an accumulation account. We came across many deeds with this problem when reviewing deeds and preparing documents to comply with the introduction of the $1.6m pension cap.  We expect that there will be many funds where commutation documents were prepared but the deeds were not reviewed, and where the deeds provide for the compulsory payout of the commutation amount.  It will be interesting to see whether the ATO will take the view on an audit that the commutation amount was paid out and so cannot remain within the fund, and under the contribution cap rules, cannot be put back into the fund.

The deed does not deal adequately with pensions

Examples of this include deeds where the deed:

  • Does not allow for the payment of account based pensions. This is particularly relevant with deeds that are more than about 10 years old.  Some such deeds only allow for the payment of allocated pensions which are no longer relevant, or contain pension terms based on allocated pensions that expressly provide for a maximum annual pension payment that is no longer relevant.
  • Has specific provisions that the terms of pensions need to comply with. For example, some deeds have provisions dealing with when the pension payments are required to be made and these provisions are not complied with in practice, such as where the deed requires regular payments and the practice is to pay the minimum required pension payment in June each year.
  • Provides that assets supporting a pension must be segregated, when the practice is not to segregate assets when there are pension and accumulation accounts.

The deed is so out of date that it is almost unreadable

This is particularly relevant if the deed was prepared before the Commissioner of Taxation began regulating SMSFs, and the deed refers to the Insurance & Superannuation Commissioner.  Watch out in particular if the deed provides that it is subject to the Occupational Superannuation Standards Act.

The deed could be enhanced to deal with the law from 1 July 2017

Examples of this include funds where the deed:

  • Does not have specific provisions dealing with the $1.6m pension cap. The deed could have specific provisions dealing with the cap not being exceeded for pensions that commence or continue after 30 June 2017.
  • Does not deal with transition to retirement pensions that are being paid and can convert ‘automatically’ to retirement phase pensions and so begin to be subject to the $1.6m pension cap. The deed could have specific provisions dealing with the commutation in part of transition to retirement pensions when they begin to be retirement phase pensions.
  • Does not deal with the characterisation of payments from the fund. From 1 July 2017 it is generally better for a person to withdraw funds from their accumulation account(s) rather than pension account(s), and anything withdrawn from their pension account(s) above the minimum required under the regulations to the SIS Act to be received as a commutation payment rather than as a pension payment.  This enables better use of the cap rules.  It would therefore be beneficial if the deed had automatic payment provisions that dealt with where the payments come from, and what they are.
  • Does not deal adequately with reversionary pensions. Generally, it would be best if a pension reverted to a surviving spouse, even if that could cause a breach of the $1.6m pension cap for the surviving spouse.  This is because a reversionary pension takes into account the value of the death benefit at the date of death of the member and not, for example, the value as at the date the trustee determines to pay the pension to the surviving spouse, and the surviving spouse has 12 months to comply with the transfer balance cap rules if the surviving spouse receives a reversionary pension.  The deed could provide for pensions to be automatically reversionary to a surviving spouse, unless the trustee determines otherwise.

Conclusion

Most SMSF deeds will not need to be amended. If they are not amended, it is unlikely that most SMSFs would breach any particular law.  However, you do not know until you review the deed and consider the client’s particular circumstances.

There are many instances in which it would be prudent to amend a SMSF deed, and it will often be cost effective to amend the deed than to review it and consider whether, in the light of the client’s particular circumstances, the deed should be amended.

We also understand that at least some auditors of SMSFs are asking why deeds have not been recently amended.  It will often be cost effective to amend the deed than to explain why the deed does not need to be amended.

Amending deeds

We have developed a deed for SMSFs that addresses the issues raised in this article.  We also have a pricing model to provide discounts for bulk orders.

Below is our pricing for bulk orders.

 Number Fee Per Fund (including GST)
1-9 $583
10-29 $495
30-49 $440
50-99 $385
100 or more $330

 

This alert is based upon an article published in the Australian Tax Week (25 August 2017).

 

Written by:

Philip de Haan | Partner | +61 2 9020 5703 | pdehaan@tglaw.com.au

Paul Tanti | Partner | +61 8 8236 1327 | ptanti@tglaw.com.au