Updating SMSF deeds and the law: among many existing good reasons, SMSF Death Benefit Agreements provide another

Changes which provide good reasons to update an SMSF deed include:

  • the ATO requires SMSF deeds to be up to date — deeds older than September 2007 are very likely to contain out of date pension provisions
  • enabling the new Death Benefit Agreements which can end the "lapsing/non-lapsing binding nominations" confusion once and for all — Cleardocs master deed updated on 4 May 2009,
  • enabling borrowing for an SMSF's investments — Cleardocs master deed updated on 31 Jan 2008
  • PDS for new members required since 2004.

 

Why change? ... not just for change's sake

Regular updates to an SMSF's deed are necessary to ensure the deed reflects current superannuation law. An updated SMSF should:

  • guide the SMSF's trustee on how to operate the SMSF in compliance with superannuation law; and
  • allow SMSF members to benefit from changes to the superannuation law or to the way SMSFs are regulated.

Most SMSF professionals accept that superannuation law changes, and other regulatory reforms, require SMSF deeds to be updated from time to time. The difficult question is when to recommend their clients to update and how to justify the cost to an inherently cost-conscious client base — particularly if the professional has recommended updates in recent years.

We look at some of the reasons for updating below. In summary, they are:

  • Up-to-date deeds help meet the Regulator's expectations
  • Borrowing under 'instalment warrant arrangements' is safest with specific clauses
  • Payment of death benefits as a member directs in a permanently-binding (until revoked) death benefit agreement (these are a new solution to the death benefit nomination binding/non-binding, lapsing/non-lapsing issue)
  • Pensions changed dramatically in 2007 with the 'Simpler Super' and 'Better Super' law changes
  • Requirements for Product disclosure statements (PDS)

As the fuller explanations below make clear, SMSF trustees and their advisers should ensure the SMSF's deed is up to date.

Up-to-date deeds help meet the Regulator's expectations

The ATO has made its views clear about the need to update deeds. In its recently published Setting up a self-managed super fund. What you need to know guide, the ATO states on page 12:

"As a trustee, you need to make sure the trust deed is regularly reviewed and updated so that it complies with the super laws (including changes to the law) and the members' needs."

Borrowing under 'instalment warrant arrangements'

One of the most significant reforms to superannuation law is the 'instalment warrant arrangement' provisions, which allow trustees to borrow money to invest in real estate, listed shares or any other asset that a super fund could ordinarily purchase.

However, for a trustee to borrow, the SMSF's deed must allow it to do so. You can read:

Most older SMSF deeds contain one or more of:

  1. a clause which prohibits the SMSF from borrowing — in which case the SMSF cannot benefit from the borrowing opportunities under section 67(4A). Deeds contain these clauses because — apart from the recent, narrow and specific changes — the law has generally prohibited (subject to even narrower exceptions) borrowing, see section 67(1) of the SISA; or
  2. a clause that generally allows borrowing as long as the SMSF also complies with superannuation law. SMSFs with this sort of clause in the deed can probably benefit from the borrowing opportunities under section 67(4A). However, these sorts of general clauses are not consistent with what banks expect to see when reviewing an SMSF deed for the purpose of assessing a loan application. Banks generally expect to see a clause that prohibits borrowing, subject to the specific exceptions afforded by section 67. Also, general clauses give no guidance to the SMSF trustee on how to comply with the specific requirements when borrowing; and
  3. a clause that prohibits the trustee from charging SMSF assets (this is generally consistent with the superannuation law). However, under an 'instalment warrant arrangement':
    • a super fund trustee arguably does not actually charge the assets purchased with borrowed money. Instead, this charging is done by the custodian of the asset under the instalment warrant arrangement;
    • the ATO has said that granting of a charge will not of itself contravene the prohibition in superannuation law against giving a charge over a SMSF asset provided that the arrangement complies with all the conditions of section 67(4A) (click here to read the ATO's view);
    • it is common for banks lending to SMSFs trustees to require that the deed contain provisions allowing the trustee to charge the SMSF's assets. If the deed doesn't contain this right, then before the bank lends the money it will require the deed be amended to include the right.

Last minute amendments to SMSF deeds should be avoided — they can be more expensive than a regular update. Accordingly, if an SMSF trustee intends to enter into an 'instalment warrant arrangement' it is very important that the SMSF's deed is up to date and consistent with the superannuation law and bank expectations.

Payment of death benefits

Superannuation law contains specific requirements about the form in which super fund members can make binding death benefit nominations. However, there is ambiguity in the law as to whether some or all of these requirements apply to SMSFs (click here to read more about this). The main result of this is some uncertainty about whether or not binding nominations by SMSF members must expire after 3 years.

SMSF members can eliminate uncertainty about how their benefits will be paid after their death by:

  1. giving a properly executed binding death benefit nomination to the SMSF trustee that is completely consistent with all requirements of the superannuation law (including the 3 year expiry requirement) and renewing that nomination every 3 years or sooner; or
  2. incorporating specific death benefit payment provisions into the SMSF deed through a Death Benefit Agreement (click here to read more).

Pensions changed dramatically in 2007 with the 'Simpler Super' and 'Better Super' law changes

Many SMSF deeds contain specific provisions about the pensions that can be paid to SMSF members. ClearLaw readers will be aware of the significant reforms to the pension rules that came into effect on 1 July, and 20 September, 2007. Following these changes, members cannot begin Allocated Pensions or Market Linked Pensions (except in very limited circumstances). Earlier changes to the superannuation law ended the ability for SMSF members to commence other forms of pensions such as Defined Benefit Pensions. Any reference to those forms of pensions in a SMSF deed is superfluous and makes the deed more difficult to read.

Some SMSF deeds do not contain a general provision that permits SMSF trustees to pay any form of pension that complies with superannuation law. Unless those deeds are updated, the current form of account-based pension cannot be paid.

Product disclosure statements (PDS)

Many SMSF deeds do not come with their own PDS. Nor is it common for SMSF trustees to seek to have a PDS drawn in relation to a SMSF.

Since 2004, the law generally requires SMSF trustees to provide a PDS to new members, see section 1012D(2A) of the Corporations Act 2001. There is an exception if the trustee "believes on reasonable grounds that the client (that is the new member) has received, or has, and knows that they have, access to all of the information that the Product Disclosure Statement would be required to contain". Few trustees could rely on this exception.

Accordingly, it is safest for SMSF trustees to provide new members with a professionally prepared PDS. It is also considerably more efficient for SMSFs to adopt a deed that includes or is provided with a PDS that has been prepared in conjunction with the deed.

Conclusion

SMSF trustees and their advisers should ensure the SMSF's deed is up to date.

Questions & Further Information

For questions or more information about SMSF deeds call Maddocks in Melbourne (03 9288 0555) and ask for a member of the Maddocks Superannuation Team.