Deed must avoid stranded money

SMSF deed stranded money

The SMSF trust deed must to ensure remaining monies in a single-member fund can be exited from the superannuation system.

Trustees and their advisers must ensure the SMSF trust deed contains clauses that will prevent money from being stranded in fund during its wind-up, an industry specialist has warned.

BDO Adelaide private wealth senior consultant Peter Crump stressed this detail is particularly important in a single-member SMSF with reserves as a result of a lifetime pension.

“If you have any reserves in your fund, I think you need to be looking for something in your rule book or deed that says you may allocate it to current members, former members, members who may have died and are still former members because the deceased member would still be a former member,” Crump told delegates at the SMSF Association Technical Summit 2022 held on the Gold Coast recently.

“The deceased member [is] a former member so if your deed doesn’t say [reserves can be allocated to] former members, the only people you can allocate it to are current members.

“So you need to make sure you can allocate [reserves] to the recently deceased by saying you can allocate to former members.”

He noted allocating reserves to a deceased former member can still happen, but doing so may be pushing the limit of the law if not specified in the deed.

“What we want to avoid is having money in the fund when it is wound up. Because if there is money in the trust and the trust is forced to be wound up, what’s the possible outcome?” he said.

“[The money] will be gone. In the past, state Treasury has put up its hand to say ‘we’ll have that thanks’.”

He pointed out allocating a remaining lifetime pension reserve to a recently deceased former member of an SMSF does not come without other suboptimal outcomes either.

“If you allocate [a substantial amount] to a recently deceased [member], will it blow up their tax return? Yes. But at least the money comes out of the superannuation fund that has served its purpose,” he noted.

During the same session, he told practitioners remaining reserves from legacy pensions must be allocated fairly.

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