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Know who supplied the trust deed

Advisers and their clients need to know who supplied the SMSF trust deed they are using as it may have significant adverse consequences, writes Daniel Butler.

There are numerous suppliers of SMSF trust deeds apart from law firms with specific sector expertise. Currently, for instance, there are a range of other (non-qualified) suppliers who supply these documents. These service providers may deliver complex documents without any qualifications or expertise.

This article seeks to explain the main differences that should be considered when obtaining an SMSF deed from a specialist law firm compared to other (non-qualified) suppliers.

Non-qualified suppliers fall into two broad categories:

  • SMSF administrators, advisers and off-the-shelf suppliers. Typically, these suppliers do not have any significant technical or legal expertise in respect of drafting legal documents, such as deeds, and simply print and bind documents that have been prepared by others. Some of the documents supplied may have once been prepared or reviewed by a lawyer, but it might be questioned whether that lawyer had any relevant expertise and also when the lawyer actually undertook a review and what parts of the documents were actually reviewed. As superannuation and tax laws are undergoing constant change, SMSF deeds should also be subject to review on at least an annual basis, preferably by lawyers who are SMSF experts.
  • Web-based suppliers are, broadly, much the same as off-the-shelf suppliers and simply supply documents. Some may claim their documents are constantly kept up to date and make claims they are signed off by qualified lawyers. However, extreme care is required when dealing with web-based systems as they generally require the user to enter data that hinges on legal analysis of the parties required to make an effective legal document, what conditions must be satisfied to effect a valid variation and other judgments requiring a degree of knowledge best found in a lawyer. These systems produce standard documents almost immediately after the data has been entered without any supervision or review by a qualified lawyer. Moreover, some of these suppliers provide a subscription service that allows a user to prepare as many documents as they like for a monthly or period subscription fee. Advisers need to be aware that using these systems exposes the adviser directly to numerous risks, including the risk of criminal sanction and other contraventions as explained below.

Many non-qualified suppliers provide a web-based portal and advisers and end-user clients are unaware of the processes performed in the background. While some law firms provide a web-based portal, the good-quality law firms have the documents reviewed and approved by a lawyer before finalising the documents. For example, a lawyer should undertake the usual checks, especially to ensure the deed is varied in accordance with the variation power in the prior deed and each relevant person or entity that must consent to the variation is made a party to the deed to ensure a valid variation is effected.

Our experience has shown many documents from non-qualified suppliers do not stand up to legal scrutiny and are defective, thus leaving clients marginalised when it comes to relying on such items as a binding death benefit nomination (BDBN) on a deed that has not been validly varied. As discussed below, there is unlikely to be professional indemnity (PI) insurance available to the adviser who prepared the deed and BDBN. The adviser preparing the documents would need to claim against the supplier who may then seek to claim against the supplier of the document, which may be a law firm that has licensed the document to the supplier. However, advisers and end users should not assume PI insurance is available as a non-qualified adviser undertaking legal work is generally not covered. Further, many non-qualified advisers may not even have insurance.

Indeed, a recent check on the terms and/or disclaimers issued by a number of non-qualified suppliers revealed they claim to provide information only, not advice, and seek to expressly exclude the fact they provide legal advice or documents, and typically recommend legal sign-off be obtained from a qualified lawyer that the user engages at additional cost before any documents supplied are used. These claims are interesting as many non-qualified suppliers are purporting to supply legal documents and then disclaim big time, requesting the user to accept all risks and to obtain their own legal sign-off. This was also noticed by some suppliers that claimed their documents were licensed from a law firm.

Despite these types of hurdles, users are often driven by low costs and not quality or value. It is therefore not surprising obtaining documents from a non-qualified supplier without any review or professional negligence insurance has increased in popularity in recent times. Many users fail to comprehend an SMSF deed received from an SMSF law firm may represent far better value, considering each deed is drafted and signed off by an SMSF lawyer and is backed by insurance. Such a document from a qualified law firm can reflect great value as it is vastly different to a non-qualified supplier.

Broadly, the supply of SMSF deeds in Australia is in certain respects like comparing someone getting their teeth fixed by a backyard mechanic rather than by a qualified dentist. While not many people would ever consider getting their teeth worked on by a backyard mechanic, they are ignorant of the complexities, traps and risks associated with using legal documents supplied by a non-qualified supplier.

We are aware of expensive litigation that has resulted from poorly worded deeds and deeds that have not been validly varied by non-qualified suppliers. One of these matters resulted in a substantial death benefit being paid to the wrong person. Moreover, our experience has also shown some advisers obtain deeds from non-qualified suppliers so they can retain extra fees that would otherwise be paid for a quality deed. Indeed, we have come across numerous advisers over many years who have never reviewed the quality of the documents they obtain for their clients.

Despite this, advisers provide their implicit endorsement that the document they select is appropriate and fit for the client’s use and purpose. Indeed, a professional firm’s selection of a particular supplier by itself is a recommendation to a client the particular document they select is fit for purpose and this choice constitutes (implicitly) legal advice.

With this background in mind, we will focus the remainder of the article on non-qualified web-based suppliers offering online production of superannuation deeds of variation (SDV).

Essentially, non-qualified services enable advisers or an end-user client to input data into the supplier’s website to produce the necessary documents electronically. Broadly, some suppliers of SDV services allow an adviser to make decisions regarding how to comply with the variation clause, what parties need to be bound by the deed or to vary the deed as they see fit. In this instance, the SDV is effectively prepared by the adviser and the adviser is therefore responsible for this documentation. If the supplier purports to have any legal sign-off, at best that would only relate to the master precedent, before any changes by the particular adviser are made.

While web-based suppliers initially appear attractive, care must be taken as such services carry a number of significant risks. Advisers who are not qualified with a current legal practising certificate are therefore taking substantial risks. Such advisers could also be placing their clients at considerable risk and be in breach of the law.

Legal services

A person can only undertake legal work for reward if they are an Australian legal practitioner. The penalties for breach of this prohibition are substantial.

Extracts from part 2.1 of the Legal Profession Uniform Law Application Act 2014 (Victoria) follow:

Section 2.2.9 provides:

9 Objectives

The objectives of this Part are –

  1. to ensure, in the interests of the administration of justice, that legal work is carried out only by those who are properly qualified to do so; and
  2. to protect clients of law practices by ensuring that persons carrying out legal work are entitled to do so.

Section 2.2.10 provides:

10 Prohibition on engaging in legal practice by unqualified entities

  1. An entity must not engage in legal practice in this jurisdiction [Vic], unless it is a qualified entity.
    Penalty: 250 penalty units or imprisonment for two years, or both.
  2. An entity is not entitled to recover any amount, and must repay any amount received, in respect of anything the entity did in contravention of subsection (1). Any amount so received may be recovered as a debt by the person who paid it.

The two offences above carry a maximum $39,642.50 penalty (250 x $158.57) as one penalty unit under the Monetary Units Act 2004 is $158.57 for the 2018 financial year. Also, a non-qualified entity or person engaging in legal practice could also serve up to two years’ imprisonment.

Legal work includes the preparation of a document that affects legal rights and that is tailored to the particular needs of another person. In our opinion, the preparation of SDVs satisfies this definition. An SDV imposes duties on the trustees, and regulates the rights of beneficiaries and possibly other parties. Furthermore, the deed defines the relationship between the trustees and members and therefore affects their legal rights. Under many web portals the entity or person preparing the SDV documents is the adviser who enters the data and makes the legal decisions, such as which parties need to be added. The preparation and tailoring of an SDV for a particular SMSF is substantially different to the insertion of the names of the parties to a standard legal form.

The case of Legal Practice Board v Computer Accounting And Tax Pty Ltd [2007] WASC 184 highlights the risks associated with advisers preparing or varying SMSF deeds, especially via the web. In this case, the accountant merely inserted the names of the trustees of the fund and some other basic details into the SMSF deed to establish a new fund. It was not a defence that the pro-forma deed had itself been drafted by a lawyer as the adviser’s insertion of the parties and other details constituted legal work.

We also find lawyer sign-off is often misrepresented by many non-qualified suppliers as it implies a lawyer signs off each document and the typical lawyer’s PI insurance is supporting the service. As discussed above, some suppliers’ terms and conditions state they are only providing information and the adviser or end user must arrange for their own lawyer to review and approve the document as being suitable for use. Advisers and end-user clients should therefore question their supplier’s claim in relation to any lawyer sign-off as it may be inaccurate or misleading, for example, was the master precedent signed off and, if so, when and by which lawyer and are they an SMSF expert? In contrast, every document we prepare is reviewed and approved by a lawyer in addition to the master precedent. In this regard the Legal Profession Uniform Law Application Act 2014 provides:

Section 2.2.11 provides:

11 Prohibition on advertisements or representations by or about unqualified entities

An entity must not advertise or represent, or do anything that states or implies, that it is entitled to engage in legal practice, unless it is a qualified entity.

Penalty: 250 penalty units.

Adviser limits under rules of relevant professional bodies

The various professional bodies in Australia have attempted to address the issue of members engaging in legal services and the associated consequences. Accountants who are members of the two major Australian accounting bodies, Chartered Accountants Australia and New Zealand (CAANZ) and CPA Australia, are prohibited from preparing legal documents under rule C3 of their professional code of conduct, which states:

3.11 Preparation of Legal Documents

Members must not carry out work which is required by law to be performed by legal practitioners.
Commentary
Legislation in various jurisdictions prohibits unqualified persons from preparing legal documents and members should ensure that they do not contravene these laws. If in doubt, refer the client to their solicitor or, if appropriate, obtain the client’s approval to instruct a solicitor.

A member of the Financial Planning Association commits an offence if the member “is found guilty of any breach of the law punishable by imprisonment of more than six months”.

Insurance cover

Most PI insurance for advisers (other than lawyers) excludes cover for services a lawyer must undertake. Therefore when an accountant, financial planner or consultant provides something amounting to legal work, they may void their PI insurance cover and find themselves exposed to beneficiary claims without the benefit of insurance.

Consequences of an invalid SDV

If SMSF trustees become subject to a legal or regulatory action, the deed will be closely scrutinised. Typically, legal action arises in such instances as death of a member, divorce, or regulatory investigation or audit.

Like a home, a deed requires a firm foundation. The prior document history is highly relevant. If there are any gaps, missing consents or incorrect interpretations, then the deed upgrade may be void. Where a deed is deemed to be void, then it is an entirely irrelevant or a wasted exercise. In this case, the trustee’s powers will flow from the prior deed.

Have you been misled?

In view of the serious risks discussed above, it seems misleading to suggest undertaking an SDV via the web is simple, quick and cost-effective. Non-qualified, especially web-based, suppliers fail to point out the serious risks involved and some represent that an SDV can be undertaken by non-qualified persons, which could result in misleading conduct under the Competition and Consumer Act 2010.

Furthermore, some non-qualified suppliers may also be liable in negligence if they fail to recommend users obtain legal advice and sign-off by a lawyer to ensure any documents created by the user are valid. Advisers themselves are also likely to be negligent should any document not be valid as measured by the competency of a qualified lawyer who would typically undertake such work.

Conclusion

While the provision of documents from non-qualified suppliers may initially appear to be a simple and straightforward method, there are numerous serious risks involved. This could expose advisers and end users to substantial risks, undermine trustee actions and have many long-lasting consequences.

Non-qualified suppliers should be required to disclose these risks to their users (typically advisers) and the ultimate end-user consumer – the SMSF trustee. This disclosure should ensure users can then make an informed decision rather than being misled that such documents have been prepared and signed off by a qualified lawyer.

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