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Self Managed Super Fund (SMSF) Article
A good quality SMSF trust deed
By Tony Negline.
This article may be out of date.
6th June 2007
The Costello super reforms which kick in very soon will force all super funds to amend their trust deeds.
Most Self Managed Super Fund trustees will rely on their advisers – accountants, financial planners or lawyers – to help them purchase the right trust deed. This is entirely understandable as most trustees do not have the personal expertise to know what should be in a trust deed or to know if they are using a good quality deed.
However given the legal and moral obligations that trustees accept when they take on this role they should probably be attempting to do their own research in order to check that their fund’s updated trust deed satisfies all the new rules.
So what are some of the issues that new trust deeds should have?
- The new type of pension, which the new legislation calls “income streams” that can be paid including transition to retirement income streams and an income stream that can be paid whilst a member is unable to perform their normal employment duties?
- Are rules still referred to which no longer apply that demand pre-retiree benefits have to be taken as either cash or income stream. For example benefits must be taken if the member is 65 and no longer gainfully employed.
- Can all types of contributions be made including contributions for people under 75 years of age? Are there restrictions on rejecting contributions which the rules do not allow such as undeducted contributions to the fund which are greater than the new minimums that apply depending on a member’s age when the contribution is made? Can the fund accept the government co-contribution? Is contribution splitting allowed for and restricted to employer contributions only (unlike the current rules which allow contribution splitting for all contribution types)? Can contributions be accepted in kind (that is not cash but the market value of assets? If so, can the trustee refuse to accept an in-kind contribution if it means that it would mean the trustee would be taking ownership of an asset that it cannot acquire from a member or other related party of the fund?
- The new rules demand that when a benefit is paid from the fund it is split proportionately between tax-free and taxable components. Is this reflected in the deed? This is different than current rules which allow members to specify some components, such as undeducted contributions, that they want paid out and other super benefit components have to be paid out proportionately.
- Does the deed allow the release of money to pay for tax liabilities which are not paid proportionately such as tax on excess non-concessional contributions, that is, undeducted contributions paid above the limits that apply? Does the deed allow members to request that excess contributions tax be withdrawn from their account balance? Will the deed allow this tax to be withdrawn from pension or non-pension assets or a mixture of both?
- Will the deed make sense now that new legislation contains many new terms and removes many expressions? For example the old legislation referred to Post June ’94 Invalidity Components, Reasonable Benefit Limits, undeducted contributions and the like. The new legislation talks about concessional and non-concessional contributions and does not need Reasonable Benefit Limits.
- Does the legal paper-work which varies the deed preserve pensions that require this, for example guaranteed lifetime or fixed term pensions or pensions with Centrelink asset test exemptions? This is extremely important because if these existing income streams are not preserved then important concessions may be lost
- Can trustees segregate assets between members and/or provide for different investment portfolios?
- Can both individuals and corporations be trustees?
- Do any steps have to be taken when the fund ceases to be a resident fund (and hence avoid tax penalties)?
- How can the members replace the existing trustees and, if so, what is the process?
- Can lump sum benefits be paid out in kind – that is, the market value of assets transferred to the member’s name – out of the fund? Does the deed allow pension payments to be paid in kind; if so, take care as the government regulators do not believe the super laws permit
- Can pensions be stopped to allow for a lump sum payment or because of family law splits?
- If a fund maintains reserves, such as an investment reserve, how are these managed and will the new rules be satisfied? Can earnings on the assets in these reserves be allocated at the trustees discretion?
- Does the deed allow binding death benefit nominations?
This is not an exhaustive list of all the issues which the new super rules demand a fund has to deal with. Trustees will want to ensure that they have some or all of these major issues covered.
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