Q: The trust deed for my Self-Managed Superannuation Fund (SMSF) has not been updated since I opened the fund in March 2008. With the super changes coming into effect on 1 July 2017, do I need to update it?

A: If you have not updated the Trust Deed (“the deed”) since the fund was established, then the deed will most likely be out of date.

What is a trust deed? A trust deed is a legal document that sets out the rules for establishing and operating your fund. It includes such things as the fund’s objectives, who can be a member and whether benefits can be paid as a lump sum or income stream. The trust deed and super laws together form the fund’s governing rules.

For all superannuation funds, the Trustees should consult the deed before making any decisions. The Superannuation Industry (Supervision) Act (SIS Act) sets out the governing rules, covenants and operating rules that all Trustees and super funds must comply with. While a deed can stipulate more onerous regulations for the trustees to follow, it is not allowed to contain clauses which permit trustees to breach the SIS Act.

Many deeds are constructed with limited details and include references to the superannuation rules (as per the SISA and supporting regulations) which removes the need for regular updates. However, if the deed quote sections of the legislation and regulations, this would require continual monitoring and regular updates.

A deed can be amended at virtually anytime, however, the trustee(s) must follow the guidelines for amending the deed as set out in the original deed of the fund. The conservative approach would be to upgrade the deed annually to reflect any changes to legislation during that period.

If your deed only refers to the superannuation rules (as per the SISA and supporting regulations), an update may not be warranted on an annual basis. At the very least, the deed should be upgraded every few years and whenever there are changes to superannuation legislation which are not reflected in the existing deed.

History has shown when legislative changes have occurred; the deed has prevented members from taking advantage of these changes. Care needs to be taken to ensure the fund remains compliant. For example, when the transition to retirement was introduced in July 2005, many members commenced this type of pension even though their deed did not allow it. This also extends to the borrowing rules introduced on 24 September 2007, some funds undertook borrowing to invest into property even though their deed prohibited the investment.

Even though your deed has not been updated since March 2008, we have seen continual changes to the superannuation laws and the introduction of covenants on trustees.  If you are working with a team of professionals (such as an accountant, auditor, solicitor and financial adviser), they should identify if your deed allows you to commence pensions, borrow funds or make certain investments before it occurs.  However, as a trustee, you are ultimately responsible for the decisions made and transactions undertaken.

It is important to ensure you do not make decisions which contravene your deed. When this occurs, the administrative penalty regime deals with contraventions of the SIA Act (and supporting regulations). It is important to ensure that your deed allows you to operate your fund within the laws. The cost of getting it wrong means the Australia Taxation Office can impose fines or penalties.  Administrative penalties for breaching the superannuation rules can range from $900 for minor administrative matters through to $10,800 for more serious matters such as breaches of the rules about the fund’s investments.

For trustees of the fund, in addition to the above administrative penalties, the penalty powers of the Australian Tax Office (ATO) include rectification or education orders, disqualifying the trustees, agreeing to an enforceable undertaking to require the trustees to correct an error, or in more serious cases treating the fund as non-complying.

So what is next?

Ensuring that your rule book is up to date is essential. Discuss this with your accountant or financial adviser who specialise in SMSF’s. Given it is nearly 10 years since the deed for your fund has been updated, it is now time to undertake this important task.

Article written by Damian Hearn, WealthPartners Specialist Adviser