Superannuation Trust Deeds
Funds must be compliant and follow strict regulations to ensure members can access the various income and capital gains tax concessions which have been implemented to encourage people to save for their future.
The fund is not a separate legal entity, so its activities are carried out by a trustee (individual fund member or corporation).
The fund must be carefully structured, and its activities governed by a superannuation trust deed which is integral to its compliance and operations. The deed should be drafted to ensure that it:
- is compliant with superannuation and other laws and allows for variations and updates;
- provides flexibility regarding investment choices including permitting the fund to borrow to invest in property;
- sets out clear processes for completing binding death benefit nominations.
Varying your superannuation trust deed
Occasionally, it may seem desirable to ‘replace’ an old trust deed with a new version to take advantage of changes in superannuation laws or new investment strategies. This is not recommended, as replacing an existing deed with a new version could constitute the creation of a new fund which could potentially attract capital gains tax and stamp duty.
In these circumstances, a deed of variation enables a comprehensive update of the old deed without triggering a tax or duty liability.
Strict processes must be followed, and it is recommended that a lawyer is consulted to review and upgrade the existing trust deed. If the trustee is a corporation then appropriate resolutions must be passed, and minutes recorded.
Binding Death Benefit Nominations (BDBN)
A BDBN is a direction to the trustee of a superannuation fund which binds them to pay death benefits to an eligible beneficiary or beneficiaries, or to your estate. Unless the BDBN is made to be non-lapsing it may lapse after 3 years if not renewed.
The superannuation trust deed should include provisions allowing members to make BDBNs which may be tailored to account for various contingencies, such as the inclusion of cascading provisions to provide for alternate beneficiaries if one or more die before the fund member. A BDBN can also identify certain assets to be left to particular beneficiaries and, if permitted, nominate how benefits are to be paid such as by lump sum or pension.
Limited recourse borrowing
An SMSF may borrow funds to purchase certain acquirable assets provided the borrowing arrangements satisfy strict requirements and the asset passes the ‘sole purpose test’. The superannuation trust deed must contain provisions to facilitate these arrangements.
An acquirable asset includes real estate for investment purposes. The sole purpose test generally means that the asset must support the investment strategy of building wealth for retirement.
The asset is held on trust and the lender’s rights against the SMSF trustee for default under the loan are limited. This means that other assets held by the fund may not be used as security. Lenders may however require personal guarantees from individual members.
Investment in real estate through an SMSF can deliver many benefits such as having control of the investment, structuring rental income to take advantage of reduced income tax, and reduced capital gains tax rates if the property is sold or transferred.
Notwithstanding the benefits, these arrangements are complex and certain pitfalls may arise through common mistakes. Compliance and procedural errors can result in additional taxes, duties and substantial penalties.
Most lenders require that the trustee is a corporate entity and a bare trust must be established to hold the property on behalf of the fund. It is essential that the correct entity is named on the purchase contract.
Trusts are complex arrangements and must be carefully managed and administered to ensure compliance and to prevent unintended taxation consequences.
The potential benefits of having a SMSF can be achieved through sound planning and advice, and a well-drafted superannuation trust deed.