SMSF trust deed review

Discussion in 'Superannuation, SMSF & Personal Insurance' started by Francesco, 1st Oct, 2019.

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  1. Francesco

    Francesco Well-Known Member

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    I am considering what to consider when updating an smsf trust deed.

    The deeds may need to incorporate provisions to account for:

    1 non recourse investment loans
    2 how to efficiently transfer death benefits to beneficiaries who are trustees in the smsf without incurring transaction costs and death duties unnecessarily, especially all the assets and investments are in a wrap investment account
    3 transfer cap limit implications
    4 expanding the allowable situations allowing for release of benefits

    Is there any other issue to consider? All comments welcome. :)
     
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Some lenders may require a explicit clause naming the lender in the deed and even the specific lending product (have seen some silly requests) and if you dont propose to use this facility it may be better not be amend for the sake of that clause alone.

    In the case of 2. The deed cant modify the death benefits cashing rule. There are no death duties but CGT can result for an asset disposal. Death may end a pension unless its reversionary and this can result in CGT. Does the deed rules and the members situation cater for this ? A modified deed wont necessarily mean an existing pension becomes reversionary.

    In 3, the law prevails over the deed and a modified deed isnt specifically needed. This is a trap with old "parrot deeds". They state rules that may now not even be lawful. But the law makes the deed provision invalid. Doesnt mean the trustee cant do it. Just means a (tax) penalty may apply if you follow the deed. eg The $1.6m Tfr Balance cap limits the amount in a pension and / or accumulation in some (not all) instances..

    In 4, Release of benefits is determined by SISA and ITAA (Why do I say both ?) SISA governs what is permitted to be released. ITAA determines the tax impacts.

    I would be considering a I love SMSF deed amendment. Grant has literally written the book on SMSFs. And is a lawyer. The deed offers and includes a variety of strategic rules. Advice on amending is legal advice and checking on how to amend may be the first step.
     
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  3. Francesco

    Francesco Well-Known Member

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    Good points. I will take a look in both SISA and ITAA and sus out what is possible and required. I just hope that the administrative procedures are not inefficient such that death benefits have to be taken out of the smsf and then need to be put back in. If that would have been the case, a journal or audit allocation the end of the year would be more efficient.

    I noticed Grant Abbott on Youtube and your endorsement confirms his relevance on these issues. Thanks.
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Death benefits "must be cashed" is the problem. Read SIS Reg 6.21 No journals, no ignoring it. Assets may be need to be sold triggering tax. Cashed takes on its meaning that MONEY and not assets must be transferred to the estate or beneficiaries. And the rules in Reg 6.21 are quite strict eg the two lump sum rule surprises many advisers. Breach that and the fund is non-complying.

    And it is worse than you may realise. If the surviving spouse is over age or over cap etc then that balance is now outside the super system and may be barred from recontribution. A reversionary pension would possibly allow it to remain in whole, in part or at the very worst deferred as a pension to the surviving spouse. If the $1.6m cap it triggered the clock will tick for it to become an accumulation balance perhaps. Read LCR 2017/3 for the modern view with transfer balance caps.

    All these complex issues require strategic financial and tax advice. Grants Book "Gurus Guide to SMSFs" is a great read in plain english. Chapter 16 covers estate planning and death. The elements of the benefits could be taxed to some beneficiaries and tax free to a spouse or some limited classes of dependants. SMSFs offer a strategy other funds dont have. The ability to formulate a smsf will if the deed permits or choose reversionary type pensions etc
     
    Last edited: 1st Oct, 2019
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  5. Francesco

    Francesco Well-Known Member

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    I will try to put a word to the authorities about the inefficiencies of cashing out with respect to smsf.

    Grant's book would be my next step! Thanks for the tip. :)
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    but does he hold a practicing certificate?
     
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes
     
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  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    They wont be changing the cashing rule. The compulsory requirement to pay death benefits is one of two key super principles. The other is retirement benefits
     
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  9. qak

    qak Well-Known Member

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    Which State? Doesn't seem to be in NSW.
     
  10. Redwood

    Redwood Well-Known Member

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    You should regularly update your deed, at least every two years

    Cheers Ivan
     
  11. Mike A

    Mike A Well-Known Member

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    When did grant become a lawyer ?
     
  12. Francesco

    Francesco Well-Known Member

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    I may have been misunderstood.

    I was referring to the special case of smsf trustee members having all their benefits within the same smsf investment wrap account. When one trustee dies and the death benefits are for another trustee within the same wrap account, the beneficiary trustee automatically have the cash benefits and could be considered to be paid already.

    It becomes superficial to withdraw the death benefits out of the smsf environment and incur all the transaction costs and later may have to contribute back into the same smsf wrap account. All the tax implications and update of assets in the smsf could be established by a professional audit.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not possible.
    Member death benefits must come out of the fund to be paid.
     
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  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Donkeys years ago.. It was his initial career. He discusses his early career in ASIC etc and financial product knowledge advising on the old OSS (Occupation Super Standards) in Guru's guide. One of his current / former business partners of his is / was practicing deed specialist too for a major practice.
     
  15. SatayKing

    SatayKing Well-Known Member

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    Amazing some Trustees do not appear to comprehend the technical obligations associated with the superannuation fund which they oversee.

    It's pretty clear from the legislation, even to this non-legal person, that death of a member is a compulsory payment situation and the funds of the deceased member cannot remain in the fund. It has to be paid out and not rolled over to another member in the fund.

    Oh well, if pps wish to ignore the law, even if they don't like the law, it's at their own peril. The ATO will not be kind I would wager.
     
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  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Absolutely 100% incorrect unless it is a reversionary pension in which case a TBAR reporting event would trigger. If so, a different process occurs and no asset sales etc may be required. SIS Reg 6.21 is very clear. And easily detected.

    You are confusing fund assets by mentioning an apparent segregated asset with member benefits. One is an asset the other a liability. A member benfit discharges a fund liability. It does this be transferring an asset - cash. This is where SMSF accounting comes in. The fund net assets reflect member benefits eg

    Asset #1 : Wrap $100,000
    Asset #2 : Wrap $100,000
    Asset #3 : Cash $12,000
    Total assets $212,000

    Reflects as member benefits : A $113,000 and B $99,000

    Member A dies. $113,000 must be cashed within the reasonable period (as soon as possible) and following the limits of Reg 6.21. To discharge the member liability to member benefits need to be recalculated and then assets realised to enable payment to be made. Trustee/s (including the LPR of A according to SISA s15A) required to discharge and pay the benefits and would sell down assets.

    Transfer of benefits between A / B is not allowed after death due to SISR 6.21. It would also be a breach of trust and may result in adverse legal concerns. A recent case addressed this very issue when the wife (remaining trustee Director) took her husbands benefits and averted the benefits being a estate asset subject to the will which allowed others to benefit.
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Why are there so many invalid SMSF trust deeds floating around?
     
  18. SatayKing

    SatayKing Well-Known Member

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    Because people are cheap and refuse to pay for competent advice? Same with joint trustee arrangements as opposed to corporate.

    A number of times I've discussed this with FP, legal and accounting professionals. Ideally you'd have a training course on the responsibilities of the Trustee and read them the riot act before they get anywhere investing. Only when they are quacking in their boots should they be allowed out in the world. Won't happen though.
     
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  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    1. The very nature of most deeds repeats all the laws as they stand today. Next year they are different.
    2. Next year they are different but many issues still are repeated so the old and new are both allowed. Many deeds allow market linked pensions. These havent been allowed for 12 years. Doesnt help to clear confusion for the new smsf does it ?
    3. Yet simple rules in a deed that are permissive for what laws allow can avoid a LOT of these "rules", which are now both valid and invalid.
    4. Its a legal service to amend a deed and that isnt cheap. So people skip that until they need to. Must do.
    5. People are cheap as Satay-King says. Its like why do people have human smsf trustees ? Not a clever thing. Its a sign of frugal choice.
    6. Who reads it ? Its not a friendly document as its long and very confusing. Hey my advisers will tell me.

    and here is my worst one....

    7. The are written by lawyers. Its meant to be a legal document not a helpful how to guide. But it really should be a how to guide to be effective. Most of the lawyers who draft these things havent managed a smsf in their life and just see it as a handbook of rules. If a deed says "You can chop off the head of a member any day you wish" it doesnt mean its possible to commit murder. It just means the trustee can be tried for homocide. If the deed says "well if you commit murder while acting as a trustee you are permitted" thats also ineffective. So why put all the laws (old and new) in writing ?? ...Answer : Lawyers can sell a deed for $300 when its thick. When its five pages thet cant.

    Grants I love SMSF deed is more a guide and a strategy document (with rules) then a rule book.

    I believe the SIS Act should contain replaceable rules for SMSF just like a company constitution. And those rules in theory can fit on a few short A4 pages. There are a few specific elements that must be in writing as defined by SISA. Most of the rest can be permissive through default clauses. One is a killer. The SIS Reg pension rules are a definite concern. Most people dont realise it but omitting the pension rules OR allowing a contribution to a pension in the rules can make the whole fund non-complying. Around 8+ years ago I did they very review and found heaps of well known deeds failed. yes failed. So the process doesnt work. So why not keep it simple and allow replaceable rules as the default unless a deed is used and then those funds only need to maintain it. In which case make the deed updating like the investment strategy and insurance - Annual review.
     
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  20. SatayKing

    SatayKing Well-Known Member

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    I detect a degree of frustration there @Paul@PFI. Fair enough too as sorting out a possible mess cannot be fun.

    Still, it does involve people as SMSF Trustees and they can do some odd things I gather. I do wonder how many even read the Trust Deed after the SMSF has been established. Mostly it'll work out I guess for the majority but I was amused by one tale where the outdated amount of $100k pa as concessional was still in and the Trustees had difficulty in appreciating why they couldn't contribute that amount "But, but, it says here...."

    Bring on 1,000 penalty units and a please explain from the ATO :)
     
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