The vast majority of clients receive their self-managed super fund deed, file it away and never look at it again. Many others may consider updating it every five years or so. However, over the last several years super legislation has been changing very quickly and in some instances, quite significantly. Leaving a super fund deed without updating it can result in some serious consequences for fund members.
We often receive enquiries as to when and how often SMSF deeds ought to be updated. We generally recommend at least every two years, due to the rapidly changing regulations governing superannuation.
To highlight the importance of frequent updates, I wanted to share a couple of cases that have come across our desks in which clients were extremely adversely affected due to the failure to update their deeds in a timely fashion.
Case study 1: Liquidation and circular deeds
In our first case, a client set up an SMSF in 1997 and, as is very common, never arranged for an update of the deed.
The SMSF came across our desk when, unfortunately for the client, the trustee company was placed into liquidation and the liquidator was an externally controlled party. The client had not taken the opportunity prior to the company being placed in liquidation to:
• remove the company as trustee of the fund, and
• appoint a party over which the members had control as trustee.
The client asked us if they could change the trustee so that the members would have control over their own super fund. However, due to the age of the deed and the provisions contained therein, this simply wasn’t possible.
Many deeds from the 1990s were constructed on the basis of a founder setting up the SMSF and appointing a trustee. The founder was often an associated party, such as a member. These older deeds often provided that the only person with the power to remove a trustee and appoint a new trustee was the founder.
In this particular case, the founder was a company which no longer existed, having been deregistered many years ago. Accordingly, there was no provision in the deed to enable a change of trustee.
Further, the deed was circular in that the founder could not be removed, except by the trustee with the consent of members. At the same time, the trustee of the trust could not be removed because the trustee was in liquidation and the founder no longer existed.
This left a liquidator in charge of the client’s self managed super fund. The client is now at the mercy of the liquidator in relation to the timing and release of their SMSF accounts and may have to resort to court action to force the hand of the liquidator to release such assets.
This entire situation could have been avoided had the client arranged for a review and update to their trust fund deed.
Castle’s SMSF deeds provide that the trustee can be removed unilaterally by the members. Had this client had a Castle trust deed in place, they would have been able to retain control over their SMSF.
Case study 2: Employers as trustees
In our second case study, a deed from the late 1970s crossed our desk and, like in the previous case, the deed had never been updated. Both members of the fund wished to draw out their account balances as lump sums (and they were at the age where this was allowed), so the client was now seeking to vest the SMSF.
Like many deeds from the 1970s, this SMSF was created by an employer who appointed a trustee to act as trustee of the fund. The deed provided that the employer retained certain rights in relation to the operation of the fund. One of the more notable rights provided that the employer alone retained the power to vest the SMSF.
In this case, the employer was a company which had been deregistered for more than 15 years. At the time of deregistration, the client had not considered either updating the deed or replacing the employer under the provisions of the deed.
This meant the client was not allowed to vest their fund and legally wind it up.
Whilst the client could access their retirement benefits, the fund will technically remain open from now until forever.
Again, this situation could have been avoided if the client had updated their deed regularly. Castle’s super fund deed does not grant powers to an employer and enables members to vest their fund at will.
As these examples highlight, SMSF deeds really should be updated regularly. This is particularly the case for deeds that are more than 5 years old. These deeds may contain provisions which were standard at the time the deed was created, but in today’s context, cause extreme difficulties for clients in dealing with their SMSFs, especially during high stress times.
At Castle, our deeds are reviewed and, if required, updated several times a year to ensure that they remain current with the latest legislation. If you need assistance with reviewing and updating deeds, please give us a call on 03 9899 6006. We’d be happy to help.