If after reading this article you have any ongoing concerns about the topic, please call us on 1300 307 343 — we will arrange for you speak about them with Julian Smith, Partner, at Maddocks.
Several of Cleardocs customers have asked it to comment on an article by Macquarie Group Services (which is not connected to Macquarie Bank) comparing various SMSF deeds. The article discusses SMSF deeds relying on deeming clauses to pay tax free pensions.
Cleardocs has read the Macquarie Group Services newsletter and email with interest, and discussed it with our lawyers at Maddocks.
The MGS article refers to the recent ATO Taxpayer Alert TA 2010/2 which deals with SMSF deeds which try to circumvent excess contributions tax.
Cleardocs and Maddocks published a ClearLaw article on this topic back in April (which you can view here).
The ClearLaw article confirmed that the Cleardocs SMSF deed does not contain the ineffective arrangements the ATO was discussing.
MGS's correspondence is clearly designed primarily to prompt SMSF advisors and trustees to seek MGS's assistance — but Cleardocs (and Maddocks) disagrees with it's basis for doing so.
What about Cleardocs' SMSF documents?
Our SMSF documents are compliant, and reflect best industry practice.
The Cleardocs SMSF deed permits the relevant fund to pay any type of pension permissible under superannuation law. It does not repeat the relevant legislative provisions.
When the pension is payable, the trustee and member have to decide what pension will be paid and on what terms.
For this purpose, Cleardocs provides an SMSF Pension Pack. In that pack, the Pension Payment Agreement contains all express provisions required by superannuation law for paying a complying (tax free) pension. The Agreement doesn't rely on deeming clauses — just as MGS suggests it shouldn't.
What's more, all Cleardocs documents are clear, simple and easy to use — with all the master documents signed-off by leading Australian law firm, Maddocks.
What is MGS talking about?
If you use the Cleardocs SMSF deed and Pension Pack, then the MGS article doesn't raise any issues for you (nor for many other people).
But if you're interested, Maddocks has set out it's summary of the 'issue' MGS is discussing —with some general comments about how pensions, deeds and superannuation law fit together generally.
MGS is talking about one sort of 'deeming clause', and the ATO is talking about different clauses
MGS refer to the recent ATO Taxpayer Alert TA 2010/2 which deals with SMSF deeds which try to circumvent excess contributions tax.
Cleardocs and Maddocks published a ClearLaw article on this back in April (which you can view here) which, by the way, confirmed that the Cleardocs SMSF deed does not contain the ineffective arrangements the ATO was discussing.
The deeming clauses the ATO discuss in the Alert, and those which MGS discuss in its newsletter, are very different.
The ATO discusses deeming clauses which try to say the facts are different from how they actually are. MGS discusses deeming clauses which incorporate legislative provisions lists a SMSF deed.
ATO & 'deeming clauses' which try to change the facts
The ATO's alert discusses clauses which try to change the facts (the ATO doesn't call them 'deeming clauses', but let's call them that for now). The ATO's example is:
- an SMSF receives an excess amount of contributions;
- those contributions are intermingled with all the other SMSF assets;
- the trustee become aware of the excess contributions (and the extra tax!);
- the trustee then tries to rely on a clause in the SMSF deed to say that the excess contributions were, actually, received on a separate trust (and can therefore be returned to the member even though the member hasn't satisfied a condition of release — like retirement).
What the ATO is saying is that the excess contributions were, in fact, received into the SMSF, deliberately, as a contribution. And the ATO's view is that the clauses in the SMSF deed can't change that fact by cleverly creating a separate trust retrospectively.
MGS — and its description of 'deeming clauses'
MGS identifies two types of deeming clauses — but neither of which you would usually rely on to pay a pension:
- First, deeming clauses which say 'if there is any inconsistency between what the Regulations say and what the deed says, the Regulations prevail'. This is a sensible provision in a deed. But what MGS doesn't say is that it's not the provision you would rely on to pay a pension. It deals only with inconsistency.
- Second, deeming clauses which say 'the deed is deemed to contain whatever the Regulations require it to contain'. Again, this can be a useful provision in a deed to, say, complement section 52 of the SIS Act which says if a SMSF's governing rules doesn't contain a required covenant, then the deed is 'taken to contain' the covenants. Again, what MGS doesn't say is that this not usually the type of provision you would rely on to pay a pension.
What sort of deeming clauses is MGS is really talking about?
MGS is really talking about deeming clauses which:
- import certain provisions of superannuation law into the deed — without restating them — that is, deeming those provisions to be included in the deed; and
- which might say 'The trustee will pay an account-based pension to the member, which pension will be paid in accordance with the requirements for payment of those pensions as set out in regulations 1.06(1) and 1.07D, which regulations are hereby incorporated into the fund's rules by reference.'
Are there any problems with clauses of this sort?
We don't think so. Here's why:
- MGS cite regulations 1.06(1) and 1.07D of the SIS Regulations by way of example;
- these regulations say that a benefit from a fund will be a pension if it is provided 'under rules of a superannuation fund that' and 'contract or rules that' contain certain provisions, conditions or restrictions;
the SIS legislation takes a very broad approach to what constitutes the rules of a fund. Guidance is to be taken from section 10 of the SIS Act which defines 'governing rules' as:
"(a) any rules contained in a trust instrument, other document or legislation, or combination of them; or(b) any unwritten rules
governing the establishment or operation of the fund, scheme or trust."
- indeed this definition even contemplates that an SMSF's governing rules can contain 'a combination' of rules in the trust instrument and those in legislation (implying, of course, that the legislation is not repeated in the trust instrument);
so if you wanted to pay a pension, say under a deed which permits any type of pension allowed by law, then:
- the trustee and member would agree a document which cites the power of the trustee to pay the pension under the SMSF deed; and
- among other things, the document would include a clause or statement which says the pension would be paid as, say, an account-based pension in accordance with regulations 1.06(1), (9A) and 1.07D, which regulations are deemed to be included in the rules for payment of the pension.
That said, our view is that documenting a pension without a pension payment agreement is not best practice, because it doesn't deal with a whole lot of other matters — for example: pension instalments, payment of reversionary pensions, etc.
As always, you need to get legal, accounting and tax advice about how best to plan your retirement incomes — understanding how your SMSF's rules work is one part of that planning.
For more information contact Maddocks on 03 9288 0555 and ask for a member of the Cleardocs Help Desk.