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Self Managed Super Fund (SMSF) Article
Can't count on 'catch-all': self-managed super
By Tony Negline.
This article may be out of date.
4th August 2010
Updating a Self Managed Super Fund trust deed is often a time consuming hassle and most trustees and their advisers go out of their way to avoid not only this administrative annoyance but also the cost of purchasing an updated trust deed.
Typically a SMSF trustee will update their trust deed every three to five years. However some trustees never update their fund's deed.
The laws impacting super funds are never static and almost never give a super fund trustee specific permission to do anything. For the period of time between each trust deed update most trustees rely on a general compliance clause and a catch-all clause to allow them to operate their fund in accordance with the law.
A general compliance clause is intended to automatically incorporate relevant legislation changes into the trust deed. A catch-all provision attempts to give trustees the power to do anything which is not prohibited by law which would not cause the fund to loose tax concessions.
General compliance clauses first appeared in the late 1980s when the then super laws demanded that some of those laws had to be in a super fund's trust deed.
With frequent changes to the superannuation laws, lawyers sought to include new rules or changes to existing standards in a trust deed by automatically deeming them to be incorporated in the trust deed.
However some general compliance clauses are drafted very widely and catch too much. Others are drafted too narrowly and catch too little.
For example in a Queensland Supreme Court case decided last year, a SMSF trust deed sought to allow for binding death benefit nominations by simply incorporating the “relevant SIS requirements” via a general compliance clause.
The disputed nomination was not binding as it failed to use the term “binding” or any equivalent terminology. The Supreme Court noted that even if the nomination had been binding the compliance provision incorporated super rules about binding nominations that apply only to non-SMSFs.
Catch-all provisions also became a popular in the late 80s as a means of making sure trustees could deal with other developments in legislation and practice.
There are changes to the law that a suitable catch-all provision or the appropriate use of catch-all language might trap.
For example, from 1 July 2008 the definitions of spouse and child were expanded in the super laws. By default this expanded the definition of a member’s dependents. This meant that the categories of people eligible to receive a death benefit increased if the trust deed allowed payments.
If after July 2008, a trustee wanted to pay a death benefit to a person who met the expanded dependant definition but they had a pre July 2008 trust deed, then an appropriately worded catch-all clause might suffice.
However, it is paramount SMSF trustees understand both the practical and technical limitation of catch-all language and catch-all provisions.
Catch-all clauses are often not accepted by third parties (such as banks and state revenue offices and land titles offices) as a source of power for a trustee to undertake particular actions.
For example, it is unlikely a major lender will lend to a trustee who relies on a catch-all provision as the source of the trustee’s power to borrow in a super gearing arrangement. Instead, the lender will require the trust deed to include an appropriately worded express power of the trustee.
A trust is not a legal entity – it is the trustee that is the legal entity. The powers of a trustee don't arise as a matter of course. Rather they may only be derived through several sources: the Courts, via legislation or by the trust deed. If the trustee undertakes an action which is not permitted by any of these sources of power, the trustee is in breach of trust.
Clearly, it is impractical for a court to continually confer powers on a trustee. Also, while the relevant State and Territory trustee legislation certainly confers powers on a trustee, certain superannuation powers are not within their scope. The super laws do not give trustees extensive powers because they generally either prohibit or permit an action.
Prohibitive powers tell a trustee they cannot do something. For example, “the trustee must not lend to a member”. A permissive power allows a certain action but does not actually authorise a trustee to take that action.
This means it’s the terms of a trust deed that are the predominant source of a trustee’s power.
An appropriately drafted catch-all provision may give a trustee sufficient power to undertake a particular action but it will probably not set out the mechanics or parameters of using that power.
In many situations, this is extremely important. Binding death benefit nominations are a good example. The super laws are not a source of power for either a member to make a binding death benefit nomination or a trustee to accept a nomination.
The super laws simply state that if the trust deed allows a third party (a member) to give directions to the trustee, the trustee will not be in breach of its duty not to delegate its decision making power.
The power has to come from within the deed. In the case of binding death benefit nominations a catch-all clause will not compel a trustee to act in accordance with the nomination. The trustee could follow the nomination if it wanted to but may not have specific power under the deed.
Another example is account-based pensions. The super laws say that if a benefit is cashed out it can be paid as either a pension or lump sum. The terms of any pension and its ability to provide for any estate planning objectives depends entirely on the terms of the trust deed.
You cannot get around this by simply saying a fund can provide whatever benefits the super laws permit because they don't provide a complete definition on the specific benefit that will actually be paid.Do general compliance clauses and catch-all clauses have any value under the current super laws? At a practical level not really, because the current super laws don't demand a trustee do anything. While the role of these clauses is limited it will generally not matter if they appear in a trust deed provided they are appropriately drafted.
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