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Why your SMSF’s ‘rule book’ may be broken (and how to fix it)

By Prime Advisory, 28 April 2016

by Hugo Furzer

As you probably know, every SMSF must have a corresponding Trust Deed. Think of it as the rule book every Trustee and Members of the SMSF must follow. And the rules cover pretty much every aspect of the SMSF’s operation, including such things as:

  • the powers and limitations of what the Trustee can do with SMSF assets
  • when and how members must apply to access their benefits
  • how members can contribute to the fund
  • how death benefit nominations are put in place.

It’s compulsory to have a Deed in place. A trustee acting on behalf of the SMSF’s members involves a degree of trust, and having these rules in place creates transparency about the fund’s purpose and protects the interests of each party.

In fact, it’s so important that all parties must sign a copy of the Deed for the Trust relationship to legally exist.

So how can a Trust Deed be broken?

Well, the Deed isn’t the only set of rules the SMSF Trustee and its members must follow. The government also has a set of rules, known as Superannuation legislation. And one of their rules states that the Trustee must follow the rules in the Trust Deed. If they don’t, the fund may be deemed ‘non-compliant’ and lose its precious concessional tax treatment.

Now that may not sound like much of a drama. After all, everyone’s following the Deed rules anyway, so what’s the problem? But what if the government’s rules become more lenient than those of the Deed?

Believe it or not, it has happened. Remember the 2007-08 Global Financial Crisis, when the financial market did a huge belly flop? (How can you forget, right?) Well, the government decided to take pity on pensioners and reduced the minimum pension SMSF Members under 65 had to draw from 4% to 2% in the 2008-09 financial year.

But what about Deeds that specifically stated Members under 65 had to draw at least 4%? Unless they also mentioned a reduced rate if the Government made a change, the Members would have had to follow the rules of the Deeds and draw that 4% minimum.

Can you now see how a Trust Deed can be broken? People under 60 in that 2008-09 financial year with a Transition to Retirement Income Stream (TRIS) in place could have potentially halved their taxable income from a pension that year. But because their Deed didn’t cater for changes to government legislation, they couldn’t take advantage of it.

How to fix a broken Trust Deed

Fortunately, most Deeds can be amended for changes in legislation.

One option is for the Trustee to have the Deed periodically reviewed by a solicitor and amended if any changes are needed.

Another option is to use a Trust Deed service. For a small annual fee they’ll update your Deed at least once a year and keep it in line with current legislation. (We think it’s the most cost-effective option for Trustees.)

So how would a Trust Deed service have changed things for those pensioners locked into drawing the 4% minimum by their Deed in 2008-09?

As we mentioned earlier, Members under 60 with a TRIS in place could have reduced their taxable income while still meeting their minimum pension. Those with large balances may have saved a significant amount of tax that year—enough for a lifetime subscription to a Trust Deed service.

And the fund would have received some tax benefits from having a Member in the pension phase.

When was the last time your SMSF’s Trust Deed was updated? Is it broken? Does it need updating? If you have any doubts, get in touch with us.

Before it really costs you.


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