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Self Managed Super Fund (SMSF) Article
Super fund benefit a question of trust
By Tony Negline.
This article may be out of date.
14th May 2008
Superannuation funds are trusts. In very general terms a trust will exist when assets are held by a person or company for someone's benefit. The person or company will be the super fund trustee and the members and their relatives are the beneficiaries.
The key document which guides how trustees run their fund is called a trust deed. Typically this document might only be one or two pages long. The provisions of this deed nearly always specify that the trustee is required to manage the trust according to the rules annexed to the back of the deed. These rules are often called the fund's governing rules and are typically for Self Managed Super Funds these will run to 40 or 50 pages.
Daniel Butler who works for the Melbourne based law firm, DBA Butler, has pointed out that typically the super laws do not empower trustee to do anything. Instead these laws often say what a trustee cannot do. The bottom line is that a trustee is not permitted to act without specific provisions in a fund's governing rules unless specific legislation allows it. Therefore a good quality trust deed is essential so a trustee knows what to do.
The principal legislation that governs most superannuation funds says that if a trustee decided to operate their fund in accordance with that legislation (and a trustee must do this if they want to get the super tax concessions), the terms of the legislation will automatically apply regardless of anything in the fund's governing rules. If the trustee keeps a keen eye on the super laws and the changes that are made to them throughout a year at least a trustee will know what they can't do!
From time to time we have heard it said that there is no need for the 40 or 50 pages of rules attached to a fund's trust deed. This line of argument says that a trustee could get away with its fund's deed saying that the trustee will simply follow whatever the superannuation legislation says at any point in time. This might be a cheap solution but it isn't practical.
So what are some of the issues which trustees should check to see what their fund's governing rules allow?
- Members & Trustees - Who can be admitted as members? How are trustees appointed or dismissed or terminated? Can the trustee be either individuals or a corporation? How are assets divided in the event of divorce? Can the fund become a Small APRA Fund? Is the trustee permitted to receive any remuneration for any activity they perform as part of the operation of the fund? How are decisions between trustees settled in the event there is a dispute? Do members have to be employed by a sponsoring employer?
- Contributions - Can the trustees accept all contributions allowed by the law? Can contributions be split between members? Can contributions only be made with cash? Can the fund accept transfers and rollovers from other super funds or rollovers of certain employer benefits? Can contributions only be received from the sponsoring employer?
- Benefit Payments - Does the deed demand that all benefit payments have to be lump sums including death benefits? Does the deed say that all benefits have to be paid as soon as a member reaches age 65 or "terminates employment with the sponsoring employer"? What types of pensions can be paid? Do the trustees have the power to document the terms and conditions of any benefit not specifically allowed by the deed? Can benefits be paid with the transfer of assets?
- Estate Planning - Can members nominate how and to whom they want their benefits paid to in the event of their death? What form can these nominations take? Can the nomination be tailored to the member's specific needs or must the nomination be of a specific type? Who in the deed is defined as a dependent? How long would a member's nomination last? Who, if anyone, will acts as trustee when the member dies and how will new trustees be appointed?
- Investing trust assets - What restrictions are placed on the types of assets a trustee can invest in? Are there any limitations to the type of investment strategies that a trustee can use or employ? Is the trustee empowered to establish a reserve? How are investment earnings to determined before it's allocated to members?
- Powers of amendment - If the trustees need to update their trust deeds, what process do they need to follow? Do the trustees need to get any individual or other entity's approval?
- General deeming clause - Are the trustees permitted to do anything or compelled to be done? Does it cover all relevant laws which potentially effect superannuation such as family law provisions and Corporations Act?
- Warnings - Does the deed contain any warnings that penalties or risks by following a course of action which are designed to alert the trustees that they should check carefully before proceeding?
- Other important specific provisions around specific super laws
This is not an exhaustive list. We will have to leave to another time why these questions and their answers are important. Another issue for later is how often a small super fund trust deed should be updated to allow for legislative change.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.