All self-managed superannuation funds (SMSFs) are established with a set of rules contained in a deed. The deed is vital to the operation of the fund – but attention to it in the establishment and conduct of a fund is often significantly inadequate to the real detriment of the fund member(s).
This article looks at some problems that frequently arise with deeds for SMSFs by reference to certain activities common to funds in the self-managed superannuation sector.
Establishment of the fund
Deeds drawn to establish an SMSF will have provision for the proposed trustee(s) to sign the document, accepting the position of fund trustee. While execution might seem a simple enough exercise, errors in execution abound. Two common mistakes:
- The proposed trustee signs the deed “as trustee”
- Deed signed before the proposed corporate trustee has been incorporated
As to execution “as trustee”, the proposed trustee of a fund to be established by the deed is not the trustee of the fund until after execution. Execution of the deed by the proposed trustee “as trustee” confuses the issue, raising questions as to the proper execution of the deed and the capacity in which the deed was signed.
As to execution prior to incorporation, it is not uncommon to see deeds prepared on the basis that the trustee will be a “constitutional corporation” and pre-dated with a date prior to the incorporation of the proposed trustee. However, companies do not exist prior to being incorporated. As a consequence, a company cannot be taken to have properly executed a deed if the date of the document is a date earlier than the incorporation date for the company.
For a variation to the deed for an SMSF to be valid, it must be made in accordance with the rules for the fund in place immediately prior to the variation. For example, if the fund deed requires that the fund member(s) alone can vary the terms of the fund deed, then a variation of that deed by the fund trustee(s), in that capacity, will be inadequate. Similarly, if the fund trustee is permitted to vary the fund deed but only with the consent of the fund members, then that consent must be obtained (at the correct time).
The requirement to follow the rules when changing the rules is frequently not observed. This is not merely sloppy service. If the rules for the SMSF are not properly varied, then the trustee may find that the rules in place immediately prior to the purported variation will continue to be the rules for the fund, irrespective that everyone actively involved with the fund may wish to run with a different position.
Change of Trustee
The underlying position with variations set out above applies for changes to the SMSF trustee (including by adding a new trustee) – the change must be effected in accordance with the rules for the fund.
With changing a trustee, there is another aspect of existing deeds that is often overlooked, namely, running with individual trustees or a company as trustee notwithstanding that the chosen form of trustee is not tolerated by the fund rules.
Unfortunately, with both changes in the trustee and rule variations, it is frequently the case that the defective drafting only comes to light when someone wants to rely on what is believed to be the current fund rules – by which time it might simply be too late to remedy the problem, at least without considerable expense.
Conducting a transaction or undertaking some sort of action involving a third party will often bring to light defects in SMSF documentation, with the deed(s) for the fund being reviewed by financiers and/or contracting parties wanting to be certain that there will be no problems enforcing a contract against a fund trustee.
Transactions, dealings and other actions taken by the SMSF trustee come with their own set of challenges for that trustee arising from the fund deed.
Consider this: The trustee does not have the power to proceed as it wishes. What to do? Amend the rules for the SMSF to include the relevant power. Sounds good – but with remarkable regularity while the variation might be correctly done it is frequently not properly done. The fund trustee is often left with a variation that beautifully binds the trustee – but which contains terms contradictory to other existing rules for the fund leaving the trustee with no choice but to have yet another document drawn to fix the newly created problem. The end result – a cluster of deeds that (eventually) fixes the initial problem, but increases processing time and the likelihood of errors occurring down the track when referencing the rules for the SMSF.
Once a deed for the SMSF is made, it cannot be ignored notwithstanding the inconvenience of its existence. At the same time, when producing a deed for an SMSF it is not enough to generate a document festooned with the name for the fund and including a provision for execution. Ignoring the law or failing to properly review all relevant documents when preparing a deed for an SMSF can lead to insurmountable problems – an outcome that can blow apart any one or more of retirement intentions, the most ingenious of investment strategies and the payment of benefits from the SMSF on death.