SMSF trust deeds: a guide
01 Dec 2021
Thinking about or have a self-managed super fund? Founder and Director of KNS Accountants, Krishan Sharma, shares expert insights on what to consider with SMSF trust deeds.
Self-managed superannuation funds (SMSFs) can provide individuals and families with greater control of their retirement funds, allowing them to make investments that they may not be able to through traditional industry or retail superannuation funds.
However, while they provide greater control, SMSFs also come with a great deal of risk and responsibility. The SMSF space is strictly governed by the Australian Taxation Office (ATO)’s rules and regulations. And if an SMSF fails to comply with these complex regulations, SMSF trustees are subject to harsh penalties.
This means that if you’ve decided to establish an SMSF, it’s essential to ensure your fund is set up and managed correctly.
One aspect you will need to consider is the SMSF trust deed. An SMSF trust deed is a legal document that outlines how the SMSF will be managed. It includes the rules and regulations of the fund, who can invest in it, what investments are allowed and how any profits from these investments will be distributed among the fund’s members.
Creating a trust deed is a requisite of setting up a SMSF. So, here’s an overview of what you need to know.
Why is a trust deed necessary?
Like all superannuation funds, a SMSF must be set up as a trust. A trust is a legal structure where a trustee (an individual or corporate trustee) holds assets on behalf of beneficiaries.
The sole purpose of a super fund trust structure (including a SMSF) must be to provide retirement benefits to the beneficiaries, who are the members of the fund. However, a key difference between SMSFs and other super funds is that the members of an SMSF are responsible for setting it up and ensuring it meets its legal obligations.
A requisite of establishing a trust is creating a trust deed. The trust deed, along with superannuation legislation, governs how the SMSF is going to operate.
When must you create the trust deed?
The first step in opening an SMSF is establishing the trust. In other words, you’ll need to decide if your SMSF will have one or more individual trustees, or a corporate trustee. You’ll then need to appoint the trustee and identify the members (i.e. the beneficiaries). Moneysmart notes that unless they choose to appoint a corporate trustee, the members of an SMSF are also its trustees.
Once you’ve covered this first step, the next step involves drawing up the trust deed.
How do you write a trust deed and what does it contain?
According to the ATO, the trust deed of an SMSF must contain details such as:
- the SMSF’s objectives
- who can be a trustee and how they were appointed
- how trustees are removed
- who the SMSF members are
- when contributions can be made
- how and when benefits can be paid – for example, as a lump sum or income stream
- whether property investment is allowed
- the procedures for winding up the fund.
A trust deed is a legally binding document that must be prepared by someone competent to do so, such as a lawyer.
Does a trust deed need to be regularly updated?
It’s important to note that a trust deed is not a static document; it should be regularly updated to accommodate the frequent legislative changes that can occur, as well as potential changes to the members’ circumstances.
While there is no steadfast rule that suggests when you should update the trust deed, we at KNS would suggest ensuring that you at least review it every three to five years to ensure that it is up to date in terms of changes in super law and member positions.
For example, you may need to update your death benefit nominations from time to time, to ensure that your benefits are managed according to your current situation. Without a relevant death benefit nomination, there is no guarantee as to how your benefits will be distributed.
Updating your trust deed is relatively inexpensive, generally speaking, and simply involves consulting a legal expert to finalise the changes suggested by the trustee and the members.
What happens if you lose an SMSF trust deed?
As the trust deed of an SMSF essentially contains all the relevant information relating to trustee powers and how the SMSF is supposed to be managed, it’s a less than ideal situation when the deed is lost. Without the trust deed document, there’s no evidence pertaining to whether the trustee is acting in accordance with the terms of the governing rules.
So, trustees should exhaust every avenue to try and locate the trust deed, including contacting any parties who may have seen it, such as financial advisors, legal professionals and auditors. It’s likely that the legal expert who drew up the trust deed will at least have an executed copy.
Unfortunately, if you can’t find it after exhausting all possible avenues, there is very little legislative guidance on how to proceed.
One possible solution is approaching the Supreme Court in your state or territory for an order regarding how the SMSF should be administered, given the circumstances. But, trustees are often reluctant to go this route because it’s typically costly and time-consuming.
Alternatively, in situations where the fund balance isn’t significant, and the investment strategy is relatively simple, trustees may agree to bear some risk and continue to operate without the trust deed. Or, they can decide to wind up the SMSF.
One last avenue that trustees can explore is to arrange for a deed of variation to be executed. A Deed of Variation changes the terms of your fund without actually creating a new trust deed. The problem with creating a new trust deed is that you’re effectively creating a new SMSF, which could lead to unwanted disposal issues or other complications down the line.
If you’re an SMSF trustee in this situation, it could be worth seeking legal and financial advice from suitably qualified experts before deciding how to proceed.
Key takeaways
An SMSF trust deed is a document that outlines the rules and regulations of a self-managed superannuation fund. In addition, it contains information about assets, beneficiaries, trustees, investment directions and other important legal documents like wills or powers of attorney for health care decisions.
A SMSF trust deed should be reviewed and updated at least every few years, to ensure it stays up-to-date with any changes in government legislation and member circumstances.
If you need help creating or updating your trust deed, make sure to get in touch with an SMSF advisor or legal professional.
Disclaimer
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.
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Image source: Image source: By Watchara Ritjan/Shutterstock.com.
About Krishan Sharma
Krishan is the founder and director of KNS Accountants. Krishan offers over a decade of experience across the world of accounting, specialising in SMEs, capital gains tax and self-managed superannuation funds.
Krishan is a member of the Institute of Public Accountants, a registered Tax Agent with the Tax Practitioners Board and an ASIC-registered SMSF Auditor. He holds a Bachelor of Commerce degree from Macquarie University, Public Practice Certificate and is a certified Xero and Quickbooks advisor.
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This article was reviewed by our Sub Editor Tom Letts and Sub Editor Jacqueline Belesky before it was updated, as part of our fact-checking process.
