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Deed Upgrades for SMSF

By H&R Block 4 min read

The Trust Deed for a self managed superannuation fund (SMSF) is a Fund's most important document, as it stipulates all the rules which govern the operation your fund.

The superannuation legislative environment has evolved significantly over the years, along with a myriad of ongoing tax determinations, rulings, court cases & ATO guidance on a range of issues resulting in new strategies developed and changes in best practice. All of these changes require an up to date SMSF trust deed to protect your interests and to get the most from your SMSF.

Risks with an old deed

Whilst legislation typically specifies what trustees 'must not' do, the governing rules of a Fund set out in its Deed specify what trustees are 'allowed' to do. In other words, even if a course of action is permitted under the Superannuation legislation, you still need to ensure that these actions are permitted by the trust deed as well.

Many old trust deeds were drafted with 'regimented' sections and unnecessary rules and consequently have not been 'permissive' enough to cater for the continual changes in superannuation law and more restrictive to operate.

There are instances where the Trustee may inadvertently act on outdated powers contained in their Deed; powers which had been removed by legislative change. Conversely, trustees may be unable to exercise certain powers due to a lack of the relevant provisions in their deed.

If Trustees undertake actions without the authority of the Trust Deed or inadvertently act on outdated powers contained in their Deed, they risk incurring audit breaches that could lead to ATO investigations and sanctions, which could result in a loss of tax benefits.

Key reasons to modernise a Deed

With the amount of changes to superannuation, it's essential that your SMSF has a robust, flexible and good quality trust deed which is reviewed regularly. Some of those changes reflect developments in best practice. Others reflect changes in the law.

Following is a list of key areas that older deeds may lack in and the reasons why we believe these deeds should be updated.

Flexible pensions

Significant reforms to the pension rules means that many older SMSF deeds have inflexible pension payment provisions which do not contain appropriate powers that permit SMSF trustees to pay newer forms of pensions that comply with superannuation law; such as members unable to begin Allocated Pensions or Market Linked Pensions.

A flexible trust deed enables all forms of pension allowable by law to be paid without restriction.

Reversionary Beneficiary Pensions

Old deeds may not allow for reversionary beneficiary pensions to be paid on a member's death; which means a continuation of a member's current pension on death to a spouse or child.

Most new deeds will provide the ability to initiate Automatic Reversionary Pensions. And from the 2017 reforms, a member's propensity to commence new and additional pensions has become increasingly difficult due to the transfer balance cap provisions.

Transition to Retirement Pensions (TTR)

Under current legislation TTRs can be commenced once a member reaches preservation age (i.e. from age 59); with up to 10% of the balance can be accessed annually. Older deeds may only allow for a pension to commence once the member has retired or reached the age of 65.

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. Added to this, the 2017 reforms removed the tax concessions on these income streams and members running TTR's will now most likely want to convert them to Account Based Pensions as soon as they are able to.

Death Benefit Payments

A major reason to update your SMSF trust deed is to better manage your benefits when you die. When this happens, the trustee of the fund must pay your death benefits to either your estate or a dependent.

Unless you make specific arrangements about how to deal with your death benefits, there is no assurance your trustee will pay them the way you want. So if you want to create some certainty about what happens to your death benefits when you die, a binding death benefit nomination (BDBN) can be put in place stipulating who is to receive your death benefits. This can be done under your will or in writing and ds not have to be in a prescribed form or renewed every 3 years in the way required by many trust deeds. The Fund's governing rules must allow for such direction to the trustee.

Member Benefit Guardians & Estate Planning

Current deeds will allow you to implement the appointment of a death benefit guardian; i.e. who will run the Fund once a member has passed away or where a member of a fund is alive but has lost mental capacity, outlining how they want their superannuation benefits to be used. Without this, it is the remaining trustees of the fund that have discretion on how the member's benefits are to be used.

A deed which incorporates these safeguards will ensure security and certainty, including the priority of death benefit lock-in provisions and that future variations cannot change binding death benefit arrangements inadvertently. It can also include sufficient options within its death benefit provisions including a capacity for trustees to pay child pensions or pay death benefits to a superannuation proceeds trust.

Commutation Authorities

Under current legislation trustees must be able to comply with the new forms of commutation authorities and have the power to pay the various taxes which may be levied; such as the excess transfer balance tax, excess non-concessional contributions tax and similar penalties even without the consent of the member. This includes the ability to refund excess contributions.

Trustees need to ensure that their SMSF's governing rules include these up to date provisions regarding excess transfer balance tax, excess non-concessional contributions tax and the process for being able to pay these excess amounts to the ATO.

Operational Mechanisms

There are a several operational mechanisms which old deeds may not be able to cater for. Trustees may want to consider whether any of the following should be integrated into their SMSF's governing rules which new deeds provide for the below.

  • Segregation - Can the trustee segregate investments between accumulation and pension phases? Segregation strategies can reap significant tax benefits however there are many deeds which do not provide for them

  • Contribution / Income Reserving - If reserve account strategies are to be pursued, the trust deed must first permit for reserve accounts to be maintained and for the allocation of amounts to and from them

  • Contribution splitting - While spousal contribution splitting may be permitted by law, it is important that the trust deed is properly set up to facilitate it

  • Acceptance / Refund of Contributions – ds the deed contain powers and instructions to the trustee regarding the inability to accept contributions in certain circumstances and the ability to refund contributions which should not have been accepted?

  • Pension rollbacks - ensuring you have up to date pension provisions including the ability to internally 'rollback' pensions to the accumulation phase. This is especially important for SMSF's that will need to comply with the new transfer balance cap rules

  • Dispute Resolution - are there mechanisms to resolve disputes between members so they can exit the fund without consent of the others?

  • Power of Attorney - Is it clear what attorneys can and cannot do on behalf of a member and are the powers appropriate? Ds the deed clearly identify the Power of Attorney when a member living overseas for more than 2 years?

  • Unnecessary Parties – A new deed will remove unnecessary parties to the SMSF. Those parties include roles which have become irrelevant over time, such as the Principal, Principal Employer (and other employer roles), Founder and similar positions

When should you update your deed?

Due to the raft of changes that have occurred legislatively since the advent of the Simpler Super reforms as well as the numerous legislative instruments, tax determinations, court cases and tax office rulings which have altered the innovative landscape and best practice of the industry, we recommend that all clients consider the need to upgrade their SMSF deeds. This is particularly critical where the members of an SMSF intend to consider superannuation or retirement planning in the near future.

We also recommend that a Deed be reviewed in detail before any major decision is implemented, e.g., commencing an income stream, undertaking an SMSF borrowing arrangement, making substantial contributions, splitting a contribution with a spouse or undertaking their estate planning.

Continual innovation in superannuation has tended to 'age' SMSF trust deeds which have not kept up to date with those changes. Well drafted SMSF trust deeds are continually reviewed to consider ways in which they can be enhanced. Therefore, trust deeds which have not been updated, will often fall short of the expectations of trustees and their advisers.

Contact H&R Block SMSF Solutions should you require any assistance in upgrading your SMSF deed.

 Important information

This content has been prepared by H&R Block Ltd ("H&R Block") ABN 89064268 800.The information is general in nature and ds not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, H&R Block, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.

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