"Anyone who takes the view that updating deeds need only happen when and if changes directly impact on a fund, runs the risk of being caught out, particularly if there is a large number of funds under an Adviser's control, each on a different cycle of amendment."
We’re often asked by SMSF trustees and their accountants ‘Why should I update my trust deed?’ The answer is simple – to be sure that the trustee has all the necessary powers to comprehensively and legally administer the fund.
The Importance of the Fund’s Trust Deed and Governing Rules
The Governing Rules are more important than the legislation
It is a mistake to think that only superannuation legislation regulates how a fund can be administered. The primary source for all the rights, powers and other rules that govern a superannuation fund is its governing rules, set out in or attached to its trust deed.
Typically, superannuation laws do not empower the trustee to do anything – rather they say what a trustee cannot do. It is the fund’s governing rules which must contain specific provisions empowering trustee actions.
The Governing Rules must be kept up-to-date
Without a good quality trust deed the trustee may lack important powers for the fully effective operation of the fund. Equally essential is the need to keep that deed up-to-date. Changes to the law do not automatically give the trustees the necessary powers to benefit from those changes!
What matters affect the Governing Rules?
There are a number of dynamic areas of development which affect the operation of an SMSF trust deed, including changes to legislation (both Federal and State), changes to regulations (both Federal and State), case decisions by the High Court, the Federal Court or any of the nine Supreme Courts, regulatory pronouncements by the ATO or ASIC, practice requirements of the professional accounting or financial planning organisations, industry practice developments, the requirements of third parties dealing with the fund (eg banks, investment managers etc), and of course developments in administration procedures and processes that could enable the fund to access more efficient administration. It is vital to ensure the trust deed accommodates all these developments.
The only thing that’s certain is change
Since 2002 there have been no fewer than 8 major changes to the laws relating to superannuation and a myriad of more minor developments. With three separate government enquiries currently under way that could impact superannuation, it is virtually certain that funds will need updating regularly in the years to come.
The Old-fashioned Way to Amend the Governing Rules
In the past the governing rules were amended by paper-based piecemeal modifications to specific clauses or complete rule replacement. Both methods had their difficulties.
Paper-based update systems are very inconvenient
Paper-based systems are time-consuming and costly with considerable administrative inconvenience, including sourcing a draftsman, arranging the drafting of new rules and resolutions, checking the drafting, execution of the deed, execution of the rules and so on. Multiply this by the many different sets of rules that are available and you can quickly see how inconvenient and tiresome the process is for SMSF advisers.
Over time paper-based update systems make the deed unreadable
If piecemeal modifications occur then over time the fund builds up a virtual library of amendment deeds that slow down any attempt to understand the deed and the changes to it. If any of those documents is misplaced the whole fund could be jeopardised.
Paper-based update systems are harder for the auditor
The old-fashioned way also makes life much harder for the fund’s auditor and therefore more expensive for the fund. Paper-based update systems are very unproductive
It has been estimated that the old-fashioned approach takes on average two hours of an adviser’s time for each fund every time they want to update. No wonder it is so expensive and both funds and their advisers avoid doing it thereby endangering the fund’s complying status.
General Compliance Clauses Don’t Ensure Compliance
Permission is not authority
It is a mistake to believe that the need to update can be solved by simply including a clause that says that the trustee will not do anything to contravene the superannuation laws. This approach is dangerous.
Where the law permits the trustee to do something they normally do not authorise the trustee to do it. They simply say that if the trustee takes this action it will not breach the law. The trustee’s power to take the action must come from the governing rules.
Prohibition can still be managed
Where the law prohibits the trustee from doing something it may be possible to redraft the governing rules to allow accommodation with the law while still reserving some rights to the fund that might otherwise have been lost.
Beware the application of APRA rules to SMSFs
Because the SIS Act applies to both APRA funds and SMSFs, a general clause might apply an APRA fund rule to an SMSF which would not otherwise have applied. Donovan’s Case has already shown up this problem for SMSFs.
Ad hoc amending of an adviser’s deeds is asking for trouble
An adviser who takes the view that updating deeds only needs to happen when and if changes directly impact the fund runs the risk of being caught out, particularly if he has a number of funds all on different amendment cycles and with different sets of governing rules. Can the adviser track all the superannuation developments and their impact on all the funds he advises? Why go through the effort of convincing the trustee to amend the rules every few years when it can be done only once more and then virtually forgotten?
Imagine the task of having to challenge an ATO ruling that the fund lacked the necessary power when the deed hasn’t been updated for years!
Auditors and Self Managed Super Funds
The 2009 auditing standards guideline demands that auditors apply their minds to whether a particular action taken by the trustee was authorised by the governing rules.
Auditors will have more comfort on this issue if the rules have been regularly updated and there is a process by which the those rules are regularly, systematically and comprehensively checked.
SUPERCentral deed update service
SUPERCentral solves the issue of updating SMSFs for trustees and their advisers as the patented online system continuously updates the fund’s governing rules to ensure that the trust deed is always compliant, avoiding potential legal, tax problems and associated penalties.
Advisers never again need to review each deed before meeting with a client, and SMSF auditors only need to familiarise themselves with one set of governing rules, resulting in significant opportunity cost savings. It also provides significant savings for clients as they never have to undertake expensive ad hoc
As a member of SUPERCentral, Advisers also gain immediate access to expert assistance from TOWNSENDS BUSINESS & CORPORATE LAWYERS specialist superannuation solicitors, along with complimentary SMSF tool kit and e-form documents to assist you with every facet of managing your SMSF funds.
For further information as to how we can assist you, please call us on (02) 8296 6266 or email firstname.lastname@example.org