SMSF professionals warned on risks with outdated deeds

“It forms the core component of the Fund’s governing rules. Whilst legislation typically stipulates what trustees must not do, the governing rules of a fund specify what Trustees are allowed to do,” he stated.

Mr Ali said ideally, the trust deed of an SMSF should be upgraded every few years.

“This type of proactive stance ensures the funds’ governing rules are current, and provides accountants and advisers with comfort that all their clients’ deeds are the same, which makes it much easier to administer funds and advise trustees,” said Mr Ali.

Mr Ali noted that the requirement to update an SMSF’s trust deed can come from many sources such as changes in legislation.

He noted that there has been a raft of legislative changes recently including the changes to the work test, reduction in the eligibility for downsizer contributions, and increase in the number of SMSF members to six.

Changes in personal circumstances may also warrant a review of the trust deed to see if it's up to date, he stated.

“For example, a member may look to go from the accumulation phase to the transition to retirement (TTR) pension phase. If the fund’s trust deed is an older deed, it may only allow for a pension to commence once the member has retired,” said Mr Ali.

“There is nothing in the legislation that states a fund can commence a TTR for a Member. Relying on deeming clauses in the deed will not provide the ability for the fund to pay such a pension because the legislation only defines a TTR in Regulation 6.02(2) and outlines the payment rules for such an income stream in Regulation 1.06(9A)(a) and Clause 1 of Schedule 7. There is no mention of a fund’s ability to pay such a pension.”

Updating the deed may also be important for estate planning purposes, he explained.

“The High Court decision re Hill v Zuda Pty Ltd [2021] WASCA 59 and Wareham v Marsella [2020] VSCA 92 outlines the importance of sound estate planning practices, such as binding death benefit nominations (BDBN). An SMSF member is not automatically granted a BDBN, the fund’s governing rules must allow for such direction to the trustee (this may include a non-lapsing BDBN),” he noted.

“With regard to death benefit payments, the fund’s governing rules are crucial in determining who will run the Fund once a member has passed away.”

It may also be necessary to update the trust deed if the trustees are looking to undertake a specific investment, he added.

“For example, a bank may require a deed to expressly allow for limited recourse borrowing arrangements before it provides finance to the SMSF, or it may be necessary to upgrade the fund’s governing rules to purchase crypto currencies,” he said.

Mr Ali wanted that without an up-to-date deed, the trustee may not be able to operate in a way that it wishes without being in breach of trust. 

“Beneficiaries may also take action against the trustees for losses or damage under section 55 of the SIS Act (for example, if a particular strategy needs to be unwound),” he cautioned.

 “Beneficiaries are not limited to seeking recompense from trustees under this section but also third parties such as accountants and financial planners.  advisers must ensure their client’s trust deed are up-to-date and allow for strategies undertaken.”