The Trust Deed for a Self-Managed Superannuation Fund (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 Superannuation Industry Supervision Act (the SIS Act) 1993 says in section 67A that a regulated superannuation fund is not prohibited from borrowing money. This is the Limited Recourse Borrowing Arrangement exception to the over-arching borrowing prohibition for Trustees in section 67. Whilst many Trust Deeds have a ‘catch-all’ clause that states the Trustee can do anything permitted by the Act, in this instance, the Act does not say a Trustee may borrow – it simply says a Trustee will not breach the borrowing prohibition, so long as that borrowing complies with the relevant sections in the Act. In many cases, this reliance is not a positive statement in the Fund’s governing rules and probably will not satisfy a bank lending to the SMSF. Under general law, unless the governing rules of the Fund expressly permit Limited Recourse Borrowing Arrangements, to do so may well breach the Fund’s governing rules.
In a similar vein, 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 mean that an Enduring Power of Attorney is appointed upon a Trustee losing mental capacity. In Self-Managed Superannuation Funds Ruling (SMSR) 2010/2, the Australian Taxation Office (ATO) states it must be the fund’s governing rules that provide the mechanism for the removal of a trustee that has lost mental capacity1.
Therefore, if the Fund’s governing rules do not expressly allow for this to occur, then the Enduring Power of Attorney cannot be appointed in place of the incapacitated Trustee. This can have severe ramifications for the Fund being considered a complying superannuation fund. Again, the SIS Act states that a Fund will not fail the definition of an SMSF if a Legal Personal Representative (LPR) is in place for a Trustee under a legal disability. The SIS Act does not state that an LPR is automatically appointed if a Trustee loses mental capacity. It would fall to the Fund’s governing rules to allow such an appointment. Having a Trustee under a legal disability and having an Enduring Power of Attorney, but not having a Trust Deed that expressly appointed the LPR in this situation, could mean the Fund may not be able to be restructured to remove the incapacitated Trustee and replace them with the LPR. This may render the Fund inoperative, as all Trustees must actively make decisions regarding the Fund (including removing a Trustee).
The requirement for updating an SMSF’s Trust Deed can come from many sources:
Legislation surrounding superannuation changes often, with some of the more prominent recent changes being as follows:
• Changes to the work test rules;
• Ability to utilise the bring-forward provisions up to age 74;
• Reduction in the age eligibility for Downsizer Contributions;
• Conversion of legacy pensions;
• Increase in the number of SMSF members to 6.
Court Cases such as the High Court decision re Hill v Zuda Pty Ltd [2021] WASCA 59 and Wareham v Marsella [2020] VSCA 92 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.
Again, by way of example, section 17A3(a) of the SIS Act states a Fund does not fail to satisfy the definition of an SMSF if the Legal Personal Representative (LPR) of a deceased Member (i.e. their Executor) is a Trustee of the Fund whilst the deceased’s benefit is being dealt with. However, there is nothing in the SIS Act that appoints the LPR as Trustee of the Fund in place of the deceased. The Fund’s governing rules would need to expressly allow for the appointment of the deceased’s LPR for this to occur.
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 the accumulation phase to the 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 Fund can commence a TTR for a Member. Relying on deeming clauses in the Deed will not provide the ability for the Fund to pay such a pension because the legislation only defines a TTR in Regulation 6.02(2) and outlines the payment rules for such an income stream in Regulation 1.06(9A)(a) and Clause 1 of Schedule 7. 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.
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 purchase Crypto Currencies.
Therefore, the Fund’s Trust Deed must be kept up to date.
Without an up-to-date 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 the Trustees for losses or damage under section 55 of the SIS Act (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. Advisers must ensure their client’s Trust Deed are up-to-date and allow for strategies undertaken.
How often should an SMSF’s Deed be upgraded? It is prudent to upgrade the Deed every few years. This type of proactive stance ensures the Funds’ governing rules are current, as well as provides Accountants and Advisers with comfort that all their clients’ Deed are the same, which makes it much easier to administer Funds and advise Trustees. The Audit Standards also require SMSF Auditors to determine whether the Trustees are acting in accordance with the Fund’s governing rules.
[1] Self Managed Superannuation Funds Ruling SMSFR 2010/2 paragraphs 44-55.
