When it comes to deciding to set yourself up in a self managed superannuation fund (SMSF), this statement has never been more profound, says Bryan Ashenden Acting Head of Advice Strategies and Knowledge at BT.
First things first
All superannuation funds are a form of trust, and an SMSF is no different, but perhaps more important. When you sign up to join a retail or public offer fund, you would be presented with a Product Disclosure Statement (or PDS) for that fund, which sets out the main rules and criteria that would apply as a member of that fund. In essence, the PDS provides you with a short summary or overview of the rules of the Trust that govern the operation of that fund.
When it comes to your own SMSF, one of the first decisions you need to make is in relation to your Trust Deed. Your fund does not exist without one, and doesn't exist until all trustees of the SMSF have signed it. In many instances you won't get a PDS with a SMSF, as essentially it would require you giving yourself a document that summarises your own fund/trust deed.
The Trust Deed governs the operation of your fund. It essentially sets the boundaries on what is and what is not acceptable for members and trustees. If you were to act outside the limits of your SMSF, then you are technically in breach of superannuation law requirements. Depending on the severity of the breach, you could see yourself subject to a financial penalty or at risk of the ATO ruling your SMSF to be non-compliant.
Not all Trust Deeds are equal
Just like any service, when it comes to selecting the Trust Deed for your fund, it pays to do some research first. Like the advice you would seek from a planner, or any administration support you may require, you would be well advised to deal with someone who has experience in this area. You should ensure your Deed has been prepared by a legal firm that you trust. If you are sourcing your deed from a planner or fund administrator, ask them who drafted the deed.
With Trust Deed, always be aware of the adage that you get what you pay for. Some Deeds may seem to be relatively inexpensive, but you need to be sure you get what you need. However, a low cost may also be as a result of the scale the provider of the Deed has been able to secure, which is why you need to look and question.
A good Deed should allow you to do broadly anything that is required under superannuation law. As an example, you could ask questions like is the SMSF permitted to borrow to invest in accordance with current superannuation law, or can I pay any type of income stream in retirement that is permitted under superannuation law . Ensuring the Deed allows for them is important, but it doesn't mean you have to use them.
Don't be caught out
There are a couple of classic examples where people have been caught out in the past. Once there was a view that if you had individual trustees for your fund, then you were not permitted to pay lump sums in retirement. Whilst this was not actually the case under law, some Deeds were drafted on this basis, meaning the members of those SMSFs were not able to withdraw a lump sum in retirement when they needed it most.
When the ability to use a transition to retirement income stream was first introduced, the drafting of many SMSF Trust Deeds meant their members could not make use of this opportunity.
What this also does is highlights the need to ensure your SMSF Trust Deed remains current at all times. If there is anything we know with (almost) certainty, it's that superannuation laws will change over time. Some changes are small, some are large. But what you need to do is ensure that your Deed remains as current as possible. The examples of deficient Deeds mentioned above can all be rectified by amending your Deed. But if you don't review it, you may miss the opportunity and when the time comes to implement a new strategy, you may find yourself waiting for a while for your Deed to be updated before you can actually do what you want.
Annual check-up is a must
How often should you review your SMSF's Trust Deed? As a minimum, you should think about doing this on an annual basis. Just like your SMSF's investment strategy which needs to be reviewed on a regular basis, your approach to reviewing your SMSF Trust Deed is the same. Think about what has changed in the last 12 months. Think about what you might want to do in the future. And perhaps, more importantly, think about engaging an expert. If you have engaged with a financial adviser, you should meet with them at least annually to ensure your SMSF investments are still in line with the investment strategy, and still appropriate to help you achieve your goals. But at the same time ask your adviser what has changed in the last 12 months and do those changes impact your fund?
Reviewing your Deed every 12 months doesn't mean it needs to be changed, but helps you reduce the chances of missing out on opportunities, or doing something no longer permitted under law. Finally, make sure you understand your Deed. Given it is a legal document, sometimes it may look and feel overly complicated. But always remember that when it comes to your SMSF, you are in control, and ultimately liable. Not understanding your Deed will be no excuse when something goes wrong. If in doubt about your Deed, ask any and all questions until you are comfortable. Then, and only then, can you truly achieve trust in your Trust.
Everybody has different needs and priorities, and it's vital that you determine the best strategy for you and your family. Talk to your financial adviser to ensure that your SMSF Trust Deed is flexible and comprehensive, and most importantly that both your SMSF investment strategy and Trust Deed are aligned to achieve your goals.
This information is current as at 26/10/2015.
BT Financial Group - A Division of Westpac Banking Corporation. This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not constitute financial advice. It has been prepared without taking account of your objectives, financial situation or needs. Because of this, before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation and needs. Information in this blog that has been provided by third parties has not been independently verified and BT Financial Group is not in any way responsible for such information.