Decision-making processes ignore key events

SMSF decision making

Decision-making processes inside SMSFs have adopted a one-size-fits-all approach that is unsuitable for when key events take place.

Many SMSF decision-making processes are unsuitable to handle key events and greater consideration needs to be given to what will take place during and after these occurrences, according to an SMSF specialist.

Smarter SMSF chief executive Aaron Dunn said the introduction of six-member funds has highlighted issues around how SMSF members make decisions that are likely to become more complex and difficult and move beyond the processes outlined in trust deeds.

“There is a very vanilla approach, ordinarily, in the way in which decision-making is done within an SMSF trust deed and it doesn’t really come down to the type of deed,” Dunn said today during a webinar.

“Typically, you find decision-making is based on a dollar per vote, or a director or member has one vote each regardless of the amount of money they have in the fund.

“There may be a deadlock provision that goes to a chairperson, or even reverts back to a dollars and balance approach, but none of these reflect any different ways for dealing with different decisions that happen inside a fund.”

He said his firm had started looking at this issue as part of its work in updating fund documents in preparation for the introduction of six-member funds and identified some decisions were more important than others and should have a separate decision-making process applied to them.

“Once we started exploring … the importance of these different decisions, we came up with this concept of a ‘key decision’,” he said.

He added these key decisions could include who could be a member of a fund, what assets could be held in a fund, when a pension could start and stop, and how to deal with the loss of capacity, or death, of any member or trustee, as well as any specific events trustees may wish to identify.

Where a key event took place, trustees and members could create their own decision-making processes, which may require a higher level of approval from the members, and Smarter SMSF was developing a form that could be used as an ancillary document with existing funds or as part of a new SMSF, he said.

“We will ask a series of questions and trustees and members can tick the relevant boxes as to particular things they want to ultimately generate inside of the order,” he said.

“The concept is to get people thinking about what are the events in a fund that will be termed a key decision that are going to need different decision-making powers other than the default inside the fund.

“For practitioners, this will be a powerful tool to be able to add value back into your trustee and member clients about decision-making and making sure that you are planning forward as to what can and can’t happen inside of the SMSF.

“This is not just going to be unique to six-member funds, which have heightened interested around this, but it does have application to all SMSFs right down to single-member funds where a member is incapacitated.”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital