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Self Managed Super Fund (SMSF) Article
Why some SMSF trust deeds shouldn't be trusted
By Tony Negline.
This article may be out of date.
31st March 2004
A trust deed is an essential document for all Self-Managed Super Funds yet a trust deed’s importance the majority of SMSF providers and consequently their clients fail to treat the deed with any seriousness.
This lack of interest about the quality of a deed is borne out of complete ignorance about what a trust deed does and its importance in controlling how a SMSF is operated.
Without exaggeration, a good quality trust deed is critical to any SMSF.
Most SMSF deeds will contain two clauses. One which effectively puts all the various super laws into the trust deed. The second requires the trustees to do everything they reasonably can to ensure the fund does not lose its tax concessions.
These catch-all-clauses merely stops you doing something contrary to the law. It will not put flexibility into the trust deed. If it is not in the deed then you might not be able to do something that the law allows.
The legal fraternity offer a wide range of SMSF trust deeds for wide ranging prices. A deed can cost anywhere from $100 to $1,000.
Unfortunately buying a trust deed is not like buying a car. The more you pay for a car, the better its quality. A range of organisations (eg the RACV and NRMA) and publications (eg Wheels magazine) evaluate what cars offer good value in various price ranges.
With SMSF trust deeds, the price bears no resemblance to the quality of the trust deed. There are good deeds that cost hundreds and bad deeds that about a thousand. No organisation ranks good and bad trust deeds in various price ranges.
There is no such thing as a perfect SMSF trust deed.
Many deed providers seem to have started with a trust deed which was once used to set up super funds for employers. SMSFs are a special type of super fund and are different to larger super funds in almost every respect. This means that the trust deed itself should be drafted specifically for SMSFs.
It is very common to see many older SMSFs with trust deeds that are 10 or more years old. In the last 10 years there has been an enormous change in the super regulatory environment. Also in that time there has been a big increase in our level of knowledge about the super rules. None of this would be reflected in an old trust deed.
From time to time, there is a need to update a trust deed. A choice has to be made between changing the whole deed or only adding, deleting or amending part of an existing deed. It would cost more to make small changes to a trust deed than if you upgraded the full deed. You should also get a much better result because all the changes in the law should be included in the new deed. As a result, either all of the deed should be replaced or none of it should be replaced.
The same price variance of buying a deed can occur with the cost of getting a deed updated. To save on costs, it is not uncommon for some people to update a deed without any reference to the previous deeds that a fund has. “If the updating process is not done properly the existing deed can be ignored,” said Dan Butler of DBA Lawyers.
This means that the fund will be administered based on the old trust deed’s rules. “The older deed might open up legal challenges especially in cases involving divorce or complicated death benefits,” concluded Butler.
So how does a trustee know if their trust deed is a good one or an absolute dud? A good place to start is to read the trust deed to see what it says. This can be hard work but it can also be very fruitful. If a trustee is inexperienced they it might need to seek the services of a SMSF professional to guide them to a trust deed that will satisfy their circumstances. Also the ATO does provide some basic information on the SMSF area of its website about what a trust deed should contain.
So what does a trustee do if they have breached their trust deed? Some action will have to be taken which will very much depend on the nature of the breach and why and how it occurred. A good attempt to correct wrongs should be actioned. Where inequity between members occurs then great care needs to be taken to address this. Different action may be required if the trustees have also breached the super laws.
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