What is a SMSF?

A SMSF is a type of trust like a discretionary trust, unit trust or hybrid trust but it has specific requirements to meet the definition of a SMSF stemming from sections 17A and 17B of the SIS Act so that it can remain as a complying SMSF and obtain the taxation concessions unique to SMSFs. If it doesn’t meet these requirements then it is taxed as a trust.

[T]he origin of the use of a trust structure for superannuation purposes is not clear. It has been suggested that since the introduction of the OSSA [the SIS Act predecessor], requiring that the rights of members to received benefits must be fully secured at all times, the use of a trust was an efficient means to comply with that requirement.[1]

Trusts are governed by trustee acts in various states and territories as well as general trusts law. For a trust to exist it must satisfy the three certainties being of subject matter (it must hold assets like the initial settled sum it cannot hold nothing), objects (it must have beneficiaries or members it cannot have no beneficiaries) and intention (it cannot be so uncertain or verbal to be uncertain as to how it is to be governed – which is no problem where a long modern SMSF trust deed is used nowadays).

The trustee is bound by the paramount duty to follow the terms of the trust deed (Minters v Youyang) so you will hear very often practitioners describe where things have gone wrong from trust parties in court they will say “read the deed” which is hard for a SMSF trust deed because it is so long and complex these days, but I would add another concept “its either in the deed or its not” and for safety and following bank requests there will be more and more trustee power and other clauses added to the SMSF governing rules as more and more additional features which make for a much longer modern SMSF trust deed compared to even the longer discretionary and unit trust deeds.

Trust deeds generally are constituted by three types of clauses – powers (of the trustee), trusts (being the list of beneficiaries or unitholders or members) and broader provisions – any written term including the schedule and governing rules.

Powers

The power clauses are generally drafted to tick the boxes “its either there or its not” and as long as they are there and appear half decent then they would be uncontroversial in the nuances of their drafting – as long as they are there. And over years there have become lots of these so they accumulate with the SMSF governing rules becoming hundred page long documents that are often not read fully by the SMSF members who adopt them. The usual solution when a deficiency is identified in the SMSF governing rules is to order a deed update for a few hundred dollars to update to new SMSF governing rules.

The other significant set of provisions in the SMSF governing rules being those provisions to link into the requirements under the SIS Act so that the SMSF governing rules are those of a complying superannuation fund. Many of these terms just say there can be as many members as the SIS Act allows or the requirements of the SIS Act are incorporated by reference or that members can only withdraw their benefits where the SIS Act allows and then those conditions of release are also as part of the trust deed not just by reference to the SIS Act so copied ver batim almost. We can call these provisions SIS Act linkages.

I won’t go into trustee powers and listing or reading through all of them.

Those investment powers should including derivatives, cryptocurrency, LRBA borrowing, investing in shares, maintaining and owning and developing real estate.

You don’t want to spend money to update the SMSF deed just to then find out the bank wants an extra power added in because the bank will generally always ask for those powers when dealing with them so the SMSF deed provider should have already kept up to date with this so if youre missing a power in your SMSF trust deed then ask your SMSF deed provider to just add the power to their new version. But I have rarely seen banks asking for additional trustee powers for SMSF trust deeds as you do for older discretionary and unit trust deeds which don’t have these long modern trustee power lists.

Trusts

The three certainties of objects being the beneficiaries of the trust and in the SMSF case the members and to an extent their death benefits nominated recipients and reversionary pensioners who can only be their superannuation dependants being spouse, children and interdependency relationship in section 10A of the SIS Act.

Provisions

Provisions cover all the words of the SMSF trust deed including the governing rules annexure and the schedule of party details. A variation clause allowing the trustee vary the trust deed is another type of trustee power to do something but it has its own nuances and should allow the trustee to vary the broad provisions of the trust deed and not just the powers and/or trusts – otherwise the governing rules in the annexure cannot be effectively replaced.

Vesting

Vesting is termination of the SMSF. The trustee will trigger the clause generally and then follow the vesting provisions to distribute final assets of the SMSF and wind up the SMSF. Note that superannuation and SMSF is excluded from the perpetuities rules (e.g. under section 17 of the Victorian Perpetuities And Accumulations Act 1968).

[1] Senate Select Committee on Superannuation ,Safeguarding Super: The Reguoation of Sueprannuation (1992) , 29; The regulation of self managed superannuation funds: An evolution oin the Commissioner of Taxation’s adminsiteative approach Thesis by Hoa Do.