Is your Self Managed Super Fund a disaster waiting to happen?

Wow! What a question! If you are like most of our business and investor clients, then you will have already established a self managed super fund (SMSF).

I wonder how that came about. Did your financial advisor tell you about the benefits? Was it your accountant just trying to save you capital gains tax on a sale of a significant asset?

All SMSFs are established with a set of rules contained in a Trust Deed. The Deed is vital to the operation and compliance of the fund.

We want to alert you to problems that can arise with  SMSF Deeds and what you can do about it.

1. Establishment of the fund

When the Trust deed is prepared it will have a section in which the Trustees need to sign to accept their role and confirm the terms of the deed.  Signing these papers might seem simple but common mistakes can cause a great deal of problems and costs later on.  A couple of common mistakes are:

• The proposed trustee signs the deed ‘as trustee’ rather than personally;
• The date the Deed is signed is before the proposed corporate trustee has been established.

Signing as ‘as trustee’, cannot occur until the formal establishment of the fund has been completed. Questions as to the proper execution of the deed and the capacity in which the deed was signed can arise if you get it wrong.

Secondly, a company cannot be taken to have properly executed a deed if the date of the document is a date earlier than the incorporation date for the company.

2. Variation

For a variation to a SMSF Trust Deed to be valid, it must be done strictly in accordance with the powers stated in the deed immediately prior to the variation. For example, if the fund deed requires that the fund member(s) alone can vary the terms of the fund deed, then a variation of that deed by the fund trustee(s), in that capacity, will be invalid. If the fund trustee is permitted to vary the fund deed but only with the consent of the fund members, then that consent must be obtained in writing (at the time).

If the rules for the SMSF are not properly varied, then the trustee may be forced to accept that the rules in place immediately prior to the  variation will continue apply. The ATO does not care if you are technically wrong and want to fix it. Timing is everything!.

 

3. Change of trustee

The variations required for changes to the SMSF trustee (including by adding a new trustee) – must be completed strictly in accordance with the rules for the fund. This might seem boring but stay with me. If you get it wrong it means someone other than you may be in control of the super fund. (like a former spouse who uses the company for another purpose)

Check the Deed to see if  individual trustees or a company must act as trustee.

The defective drafting usually only comes to light when someone wants to rely on what is believed to be the current fund rules – by which time it might be too late to remedy the problem, without great expense.

4. Transactions/dealings

When entering a transaction or undertaking some sort of action involving a third party (buying a property) often brings to light defects in SMSF documentation. Banks and other Financiers will read the terms of the Deed strictly or a party to a contract will check  to be certain that there will be no problems enforcing that contract against a fund trustee.

What happens if the Trustee does not have the power to enter into the transaction? Can you just later amend the rules for the SMSF to include the relevant power? If it were only that simple.  The fund trustee can be bound legally to perform but with a question as to whether it was a valid exercise of power. The financier might refuse to lend the funds necessary unless and until a further Variation is signed. A costly and most likely, urgent problem to deal with.  The end result – a number of deeds that fixes the initial problem, but creates a paper trail that is much harder to follow.

Does the invalid trustee appointment give the ATO a right to challenge the transactions entered into by the trustee and will that cause additional tax to be payable?

If the change relates to a change in the law then it is best to get this done when recommended by your accounting advisor or fund auditor.

5. A Prudent Approach

A sensible position to take is every time you handle a SMSF ask whetehr it an be checked for compliance. Every time you make a change, resolve key decisions, appoint a trustee or add or remove a member, make sure the basic establishment facts are checked.

Don’t  risk failing to have a valid document for your retirement intentions, your clever investment strategies and the payment of benefits from the SMSF on death!