Updating the SMSF trust deed is something that should be done on a regular basis. But how one goes about it can be contentious and auto updates need careful assessment, Kathleen Conroy reports.
The Australian Taxation Office (ATO) tells us the trustee of an SMSF must regularly review and update the fund’s trust deed. A number of providers offer a service whereby they will regularly review fund deeds so that this task in the administration of a fund is always addressed, and addressed in a timely fashion. Great idea? In this article we consider some points to which a trustee should turn their mind before signing up to a service of this kind.
Background
The governing rules for an SMSF are found in the superannuation legislation and the fund’s deed. The deed is a critical component of those rules. Without limitation, a fund trustee is not able to undertake certain actions, regardless that it may be permitted by superannuation legislation, if it is not also permitted by the deed for the fund. Areas in which legislation has changed, thus illustrating the need for fund deeds to be reviewed, include:
- borrowing,
- the release of funds,
- the making of death benefit nominations,
- contribution splitting, and
- transition-to-retirement income streams.
At the same time, through the Superannuation Industry (Supervision) (SIS) Act 1993, certain covenants are incorporated into a fund deed, or, put another way, the fund trustee (and directors of a corporate trustee) is bound to ensure the fund trustee acts in certain ways at the risk of action against it. These promises by all SMSF trustees, according to sections 52(1)(b) and 51(1)(c) of the SIS Act respectively, include:
…exercise, in relation to all matters affecting the [fund], the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;
…ensure that the trustee’s duties and powers are performed and exercised in the best interests of the beneficiaries.
Furthermore, as defined by section 55(3) of the SIS Act, if a person “suffers loss or damage as a result of” a trustee acting in contravention of one of the above covenants (or any by which it is bound as a consequence of the fund’s governing rules), that person may within the specified time frame take action against the trustee (and any other person involved in the contravention).
It follows that for a trustee to take full advantage of the law, prudently conduct the affairs of the fund, and operate the fund in accordance with the law, the trustee should ensure the deed is regularly reviewed and, where relevant, updated.
Who can review and update
The trustee has the ultimate responsibility for the conduct of the fund and, as a matter of trust law, is obliged to act personally. The trustee is, though, not bound to personally perform all functions associated with the office and is able to delegate the performance of certain tasks associated with the running of the fund to a third party. This ability is embedded legislation, section 52(3) of the SIS Act providing that a fund trustee is not prevented “from engaging or authorising persons to do acts or things on behalf of the trustee.
Service providers – method
Update services come in many shapes and sizes. At one end of the scale, there is the legal professional whom the trustee engages directly and at the trustee’s instigation to review and, where necessary, update the deed. To properly discharge these instructions, the lawyer should consider specific instructions from the trustee and discuss with the trustee the need for and effect of any deed amendments sought. We are not considering that personal service here. We are considering, rather, the service provider who automatically updates the deed for all its clients with changes in the superannuation law (to the extent that law is relevant to the conduct of an SMSF), otherwise known as an auto update service.
One way an auto update service works is like this:
- the service provider is empowered under the current rules for the fund to update the deed without a meeting of the fund trustees,
- when the superannuation law changes, the provider executes the necessary deed of variation or amendment to the fund rules,
- the amendment replaces all current fund rules with a new set of rules incorporating the new law,
- the trustee is advised that the deed has been amended, and
- the new rules are posted on the service provider’s website and/or forwarded to the trustee for the trustee’s records.
The trustee may be given the opportunity of rejecting the proposed update, while in some forms of the service, the trustee can elect annual updates or updates on demand. Where the trustee wishes to make a change independently of the service provider, this is only permitted with the approval of the service provider.
Auto update advantages
Provided updates are properly made, an auto update service has several advantages. Most obviously, the fund deed will always reflect current superannuation law. Other advantages auto update services advertise include:
- that the trustee is relieved of the need to monitor superannuation law for changes,
- low cost (particularly compared to a visit to a lawyer),
- the storage of all upgrade deeds in one place (that is by the service provider), and
- an option to reject the upgrade within a certain number of days of it being proposed by the service provider.
Do the advantages seal the deal?
While there are advantages to this form of service, there are a number of factors a trustee should consider before adopting such assistance as a matter of course.
Prove document chain: A fund trustee should only act under proper power. Regardless of innocent mistakes and the intention of the trustee, courts will not necessarily uphold an act by a trustee who has not been properly appointed or in reliance on a power introduced to a deed by an amendment not properly made. The importance of following proper procedure is seen in Meier v Dorzan Pty Limited & Anor, wherein Justice Slattery noted with respect to purported changes to the fund trustee and governing rules: “As a consequence of the ineffectiveness of the attempt to first appoint Mr Meier as a trustee, all subsequent attempts to amend the trust deed and to appoint new trustees are equally ineffective. A person invalidly appointed as a trustee cannot exercise powers given to the trustee under the trust deed. Furthermore, none of the subsequent attempts to appoint trustees were attempts to appoint a trustee in conformity with the trust deed.”
Accordingly, with respect to any of its acts, a trustee must be able to:
- ensure they can produce the deed establishing the fund and each document that purports to effect a change in the fund trustee and each document purporting to vary the fund rules, and
- provide evidence that any process for making a change (either in fund trustee or fund rules) has been properly followed.
In these circumstances, the trustee must ensure that where they use an auto update service, any amendment to the fund rules has been properly made and they will be able to produce all sets of rules for the fund since the date of its establishment.
Is the relationship with the service provider appropriate?: Through section 52(2)(e) of the SIS Act, an SMSF trustee is “not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee’s functions and powers”. Without limitation, a trustee who enters into any arrangement that prevents them from varying the terms of the fund deed in a timely manner would see the trustee contravening this covenant.
Personalised variations: As noted above, certain auto services replace all rules governing the fund in each ‘amendment round’. Where a fund deed has been drawn or varied to incorporate provisions peculiar to an individual fund, then these personal arrangements may be upset by the auto update process.
Necessity and complexity: It is not necessary for every change in superannuation law to be reflected in a fund’s deed, so that in signing up for an auto update service the trustee could, in fact, be setting themselves up for the creation of a needlessly populous chain of documents for the fund. At the same time, automatic updates can amount to a rendition of the law, making the deed both lengthy and difficult to understand.
More on necessity: Auto update services may reproduce in the fund rules provisions that are not necessary to a fund trustee (at least at the time) and can be easily imported into the deed at a later date if required.
Requirements outside the law: It is not unusual for a variation made strictly in accordance with the law to be inadequate for a trustee’s purpose. A topical and clear example of this is deed amendments made to allow a borrowing for the purchase of a single acquirable asset pursuant to section 67A of the SIS Act. As any trustee who has embarked upon this process will likely know, many major financiers will wish to see in the fund deed powers for the trustee beyond those immediately required for the exercise of the borrowing right in section 67A. Similarly, an update that incorporates into the fund deed the rules with respect to binding death benefit nominations, as set out in the superannuation legislation, does not consider that (at least as far as the ATO is currently concerned) there is no legislative requirement for a binding nomination made in the context of an SMSF to lapse after three years.
Prohibition on delegating discretionary power: A superannuation fund is a special form of trust and, subject to legislation, trust law applies in the conduct of that fund. As a matter of law, a trustee is prohibited from delegating its discretionary power. Where the trustee, without turning their mind to it, allows a service provider to update a deed at the discretion of the service provider, it is arguable the trustee has not properly performed their office if they do not (at least) oversee the conduct of the people to whom they delegate that function.
Ultimate responsibility: Regardless of any contract between the fund trustee and the provider of an auto update service, the trustee is ultimately responsible for the conduct of the fund. In any action against a trustee, or where a trustee finds themselves liable for acting outside a power, it will not be a defence for the trustee that they had engaged the services of a third party to keep the rules for the fund current.
Conclusion
Superannuation law is complex and it is not expected that each SMSF trustee will be ‘full bottle’ when it comes to that law. It is, though, a requirement for all SMSF trustees to turn their respective minds to the proper administration of the fund, and it is both dangerous and difficult to see that this duty has been met where a fund trustee abdicates duty for the maintenance of the fund deed to a third party. There is a place in the administration of an SMSF for a service with respect to the updating of the deed for the fund, but that place must always provide for the active and informed participation of the fund trustee in any amendment process.