A commonly overlooked trap with transition-to-retirement income streams (TRIS) and documents is that they are not prescriptive and do not necessarily force an SMSF trustee or member to act in a certain way.
“Trustees and members are broadly free to agree on pension and deed rules that they like, subject to the regulation overlay and tax overlay of the law,” DBA Lawyers senior associate David Oon said during the firm’s recent SMSF Online Update.
“So the trap here with TRISs is that your documents could actually be undermining what’s happening.
“What I mean by that is what if TRIS documents don’t mirror the law exactly and they simply say something like this: ‘The pension payments must be limited to a 10 per cent maximum and there are commutation restrictions.’
“Or what if the TRIS documents say something that’s not clear, in that respect?”
Oon said if that was the case, advisers must question whether the restrictions that were built or hardwired into the TRIS documents fell way upon meeting a condition of release.
“I think that the better view is that the Superannuation Industry (Supervision) (SIS) Regulations don’t actually say that they fall away, but the SIS regulations permit them to fall away,” he said.
“So it could well be the case that your pension documents say that the 10 per cent maximum is still there.
“And even if the argument was contentious, you just don’t want your clients going around with documents that really aren’t clear as to whether they can take more than 10 per cent and they’re doing it – they’ve met a condition of release with a nil cashing restriction, they’re taking all the money they like and their documents really aren’t clear, or even worse, flat out say ‘limited to 10 per cent maximum’.
“These restrictions probably don’t fall away if they’re hardwired in, so people might not even be adhering to their own pension rules.”
He posed that as long as the trustees were complying with the superannuation rules, the ATO might not be able to check that part necessarily, so did it even matter that they were not adhering to their own hardwired requirements in their TRIS documents.
“Is that even a problem?” he said.
“Well, I put to you, what is the primary duty of an SMSF trustee?
“Justice Logan in the Interhealth Superannuation Fund decision summed it up nicely by saying a trustee’s most fundamental duty is to comply with the terms of the trust, so essentially, it’s to follow one’s own rules.”
Looking at what the governing rules of an SMSF are, Oon noted: “They are actually defined in section 10 [of the SIS Act] much more broadly than the deed whereby governing rules means any rules contained in a trust instrument, other document or legislation, or combination of them, governing the operation of the fund.
“That is pretty broad, so do pension documents fall within the category of ‘other documents governing the operation of the fund’?
“Yes, they probably do – trustees are held to their own pension documents in a very real sense and this becomes especially true where you have people fighting about what’s going on within the SMSF or if a family dispute occurs later and a person has been taking more than their pension documents actually allowed them to.
“You can get yourself into a pretty sticky situation, so you just don’t want your clients to have documents that open them up to challenge later, so don’t let them fall into that trap of having inadequate documents.”