Bad Deeds: Is your SMSF at risk?
This month, we shortcut the review process and highlight the key SMSF trust deed problem areas.
Australian SMSFs totalled 414, 168 in June 2015, yet despite their popularity, many SMSF trustees are unaware of what their trust's deed says, particularly regarding what it does and does not allow.
Your SMSF's trust deed is its rulebook and if your deed doesn't recognise or allow something then the trustees are not allowed to do it.
In spite of this, there are many trustees who are quite unaware of what is in their trust deeds and consider it as something that was required when the fund was established. The problem is that unless you amend it, it is only current for the circumstances that existed when it was written.
Laws change regularly and so do individual circumstances, so it is important to regularly review your SMSF trust deed. This month, we shortcut the review process and highlight the key SMSF trust deed problem areas.
One of the more common issues that come out of auditing your SMSF is that often an SMSF pays pensions and other payments to members that aren't allowed by the trust deed. There is often an assumption that because superannuation laws allow for these types of payments that it's okay.
The problem is that your deed must allow for such types otherwise you're in breach of the deed's rules. This is especially important for deeds created before 1 July 2007, when super laws on pension payments changed significantly.
There are several aspects of an SMSF deed that will have a direct impact if you die or your circumstances change. It's important to keep your deeds up to date via regular review to ensure it meets your current circumstances, not just those that existed when you created the deed. For example:
- Does your deed allow you to nominate the person (or people) who will receive your super when you die? Some deeds don't allow for binding death nominations and in some cases, the remaining trustees decide who gets your super.
- If you have death nominations in place, is the wording consistent with requirements of the trust deed?
- Is it clear who has the power to add or remove trustees? There are a lot of court cases involving children who were excluded from a parent's super by a new spouse – and vice versa.
- When does someone become or stop being a member? Some deeds will automatically remove members with a nil balance.
- Does your deed allow the use of reserves or other strategies that your accountant may recommend at year end to minimise tax? Some deeds don't allow for effective tax planning strategies!
If you are not clear on the what your SMSF deeds stipulate, please contact your accountant on 02 9957 4033. It is also important to review the tax effectiveness of your super arrangements and ensure you're set up with a tax effective strategy.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.