SMSFs: Good Deed, Bad Deed
Not all SMSF trust deeds are created equal. Some are good, some are bad. But why does it matter?
The provisions of a SMSF trust deed are critical for the effective and valid operation of a SMSF, including in respect of the implementation of superannuation strategies, investment transactions and estate planning.
Advisers and SMSF trustees should, as a minimum, consider the provisions of a SMSF trust deed at the following times:
- Upon establishment of the SMSF;
- Prior to the SMSF trustee(s) or member(s) undertaking a transaction or implementing a plan, such as investing the assets of the SMSF, entering into a ‘limited recourse borrowing arrangement’, changing trusteeship, amending the SMSF trust deed and paying benefits to members; and
- Preparing ‘binding death benefit nominations’ in respect of a member.
If a SMSF trustee enters into a transaction, or purports to implement a plan, that is not supported by the provisions of the SMSF trust deed, advisers could potentially be subject to the claims of affected parties if the transaction or plan is later found to be invalid or ineffective under the terms of the SMSF trust deed.
- Every SMSF trust deed, and all SMSF-related documentation (including those relating to trust deed amendments, trustee appointment and removal, binding nominations, etc) will be heavily scrutinised in the event of a dispute relating to death benefits.
It is important to note that it is the provisions of a SMSF trust deed, and not the SIS Act or SIS Regulations, which generally empowerSMSF trustees to act.
The provisions of the SIS Act and SIS Regulations are essentially ‘permissive’ and ‘prohibitive’ provisions – that is, they either ‘permit’ a SMSF trustee to undertake a particular course of action (if the trustee is so authorised under the terms of the SMSF trust deed) or they ‘prohibit’ a SMSF trustee from undertaking a particular course of action (notwithstanding the provisions of the SMSF trust deed).
This is no more evident than when a SMSF trustee wishes to enter into a ‘limited recourse borrowing arrangement’.
For example, section 67(1) of the SIS Act provides as follows:
“67(1) Subject to this section and section 67A, a trustee of a regulated superannuation fund must not:
- borrow money; or
- maintain an existing borrowing of money.”
Section 67A(1) of the SIS Act provides as follows:
“Subsection 67(1) does not prohibit a trustee of a regulated superannuation fund from borrowing money, or maintaining a borrowing of money, under an arrangement which….”, etc.
That is, section 67A(1) does not ‘empower’ or ‘authorise’ a SMSF trustee to borrow money to acquire an asset – it merely doesn’t prohibit such a borrowing if the relevant conditions are met.
If a SMSF trustee wishes to enter into a ‘limited recourse borrowing arrangement’, the SMSF trust deed must specifically empower the SMSF trustee to do so.
For example, consider the following two common ‘borrowing power’ clauses in SMSF trust deeds:
|Effective Clause||“The Trustee may borrow or raise any financial accommodation up to such amount as the Trustee determines and may assign, pledge, mortgage or charge an asset or assets of the Fund as security for such borrowings.”|
|Ineffective Clause||“The Trustee may borrow or raise any financial accommodation up to such amount as the Trustee determines and may assign, pledge, mortgage or charge an asset or assets of the Fund as security for such borrowings, but only if Superannuation Law permits.”|
The Effective Clause clearly permits and empowers a SMSF trustee to borrow money. However, the Ineffective Clause only permits or empowers a SMSF trustee to borrow money if superannuation law permits.
As superannuation law does not ‘permit’ borrowing, a SMSF trustee who relies on such a clause to borrow money is arguably in breach of the SMSF trust deed and, consequently, superannuation law.
Section 55(1) of the SIS Act provides that “a person must not contravene a covenant contained, or taken to be contained, in the governing rules of a superannuation entity.”
A SMSF trustee will contravene this section if it acts contrary to the powers contained in the SMSF trust deed – for example, the SMSF trustee borrows money to acquire an asset when the SMSF trust deed does not provide such a power.
Interestingly, a contravention of section 55(1) of the SIS Act is not an offence that results in a civil or criminal penalty for the SMSF trustee – however, contravention of the SMSF trust deed can result in a significant penalty via the taxation system as the SMSF can be made ‘non-complying’ as a result.
A person who suffers loss or damage as a result of a contravention of section 55(1) may recover the amount of the loss or damage by action against any person involved in the contravention (under section 55(3) of the SIS Act).
Accordingly, not only is it in a client’s best interests to have a good SMSF trust deed, it’s in their adviser’s best interests as well.
If you have any queries or concerns in relation to SMSF trust deeds (or SMSF documentation more generally), please contact Matthew Allan (our SMSF expert).