Knowledge Details | InterPrac

Knowledge Details

InterPrac Knowledge Base

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Superannuation Funds

I have heard that super funds should not hold units in related unit trusts. Is this right?

The main thing to be careful about is the restrictions on investments that SMSFs can make.

In particular there are the "in-house asset rules", which generally prohibit a super fund from investing more than 5% of the fund's assets in a related party. Normally the unit trust will be a related party, and the acquisition of the units will be an investment - so you will need to be careful about this (especially if the SMSF already has other in-house asset investments!).

For example, if the SMSF has $100,000, the maximum it can generally invest in related parties (in total) is $5000.

There are exceptions to this, but it's best to obtain specialist advice if you would like an SMSF to invest in a unit trust.

Income from a unit trust may also be "non-arm's length income" in the hands of the fund and taxed at penalty rates.

In addition, to be safest, SMSFs should only really invest in fixed unit trusts, so that they have a fixed interest in the trust's assets (and the trustee cannot "siphon" funds out of the trust by, for example, issuing units to someone else for less than they are worth).

For example:

  • Assume a unit trust starts out with no assets.
  • SMSF buys 100,000 units in the unit trust for $1 each.
  • Individual buys 100,000 units in the unit trust for $1 in total.
  • The unit trust now has $100,001, and, theoretically, the SMSF has a 50% interest in that (worth $50,000.50), and the individual also has a 50% interest in that (worth $50,000.50). So the individual has effectively siphoned funds out of the super fund.
  • This can't happen with a fixed unit trust - units must be issued for what they are worth.
  • But, you'll still need to consider in-house asset rules!!


Note: If we receive an order setting up a unit trust with an SMSF subscriber, unless we receive explicit instructions to the contrary, we will assume that the investment in the unit trust is consistent with the SMSF's investment strategy.

Note also that we provide a separate (non-geared) unit trust deed that is specifically tailored to having an SMSF as a unitholder. You can order this Non-Geared Unit Trust online. Of course, this unit trust deed by itself does not guarantee compliance by the SMSF unitholder with the superannuation legislation.

For more information read this Tax Warning for unit subscribers for Super Funds

I note that there are different versions of your superannuation fund deed. Can you tell us what the differences are between them?

Not really! We originally provided superannuation funds solely through DBA Butler Lawyers and these orders were all processed by DBA Butler’s legal team.

 

We have since been able to offer this service “in house” by obtaining documents from external law firms (including Holding Redlich and Hall & Wilcox). Using their deeds and documents, we are able to prepare all of the paperwork, etc, for superannuation funds, and the final product is checked by our own legal team. This arrangement has allowed us to offer those deeds at a lower price.

 

Obviously the deeds look different because they're drafted by different law firms, but they all comply with the current Super Fund laws, taxation laws etc.

 

The following Q and A’s primarily look at the deeds we provide in-house.

Are your Self Managed Superannuation Fund (SMSF) deeds updated for the new legislation?

Yes. The InterDocs deeds should be flexible enough to take into account future changes in the law, but as changes occur (which is often) our lawyers then draft changes to our new deeds as quickly as they can whilst maintaining their high quality.

If you would like to upgrade your SMSF deed, you can do so by ordering a deed of variation online.

Why do all of the members have to be trustees?

To be a self managed superannuation fund (or SMSF), the fund needs to meet the definition of a SMSF in S.17A of the Superannuation Industry (Supervision) Act 1993.

One of these requirements is basically that, for all funds except for sole member funds, all of the members must be trustees (or directors of the corporate trustee), and all of the trustees (or directors of the corporate trustee) must be members.

However, where a fund has only one member and individual trustees, it is required to have two individual trustees.

I heard that if a child is a member of an SMSF, the child does not need to be a trustee. Is this right?

Yes, that's true. As usual, there are a few exceptions to the general rule above. In the case of children, S.17A(3)(c) allows the parent or guardian of the child member to be a trustee (or director of the corporate trustee) of the fund in place of the member (even if the parent or guardian is already a trustee/director of the corporate trustee).

Unfortunately, in order to maintain our low prices and high services levels, we generally don't prepare any funds which go outside the general rules set out above. That is, we usually only set up SMSFs where all of the members are trustees (or directors of the corporate trustee), and all of the trustees (or directors of the corporate trustee) are members (or where a fund has only one member and two individual trustees).

Nevertheless, if so requested, we may consider amending our SMSF documents (e.g., to allow for a parent or guardian of a child to be a trustee/director of the corporate trustee in the child's place). Please contact us before placing your order if you have this situation.

Can the trustees and members use the accountant's address instead of their residential address?

Yes they can, although it's better if they include their own address (including the address assists with identifying the right person, in case there is any ambiguity). Nonetheless, the law doesn't state that the deed/fund needs a residential address for anyone in the fund.

Are there any major pros and cons of having a corporate trustee or individuals?

In most situations it will be better for an SMSF to have a corporate trustee, rather than individual trustees. The major disadvantage of a corporate trustee is the up-front cost of establishing the company. However, there are longer-term benefits of having a company which generally outweigh the extra costs.

The following table looks at the advantages and disadvantages of a corporate trustee over an individual trustee:

CORPORATE TRUSTEE..........INDIVIDUAL TRUSTEES
Sole member SMSF   Sole member SMSF
You can have an SMSF where one individual is both the sole member and the sole director.   A sole member SMSF must have two individual trustees.
Continuous succession   Ceases upon death
A company has an indefinite life span; in other words, it cannot die. Therefore, a corporate trustee can make control of a SMSF more certain in the circumstances of the death or incapacity of a member.   If the SMSF has individual trustees, eg, a mum and dad SMSF, then timely action must be taken on the death of a member to ensure the trustee/member rules are satisfied (SMSF rules do not allow a sole individual trustee/member SMSF).
Lump sums and pensions   Lump sums only payable on commuting pension
An SMSF with a corporate trustee can pay benefits either as pensions or as lump sums.   Some practitioners argue that the member must surrender or commute their pension entitlement if they wish to obtain a lump sum (as an SMSF must have its primary purpose of paying a pension). According to this argument, a fund cannot simply pay a lump sum benefit, and extra paperwork is needed to evidence the pension entitlement first being requested and then being commuted.
Administrative efficiency   Extra and costly paperwork
When members are admitted to, or cease, membership of the SMSF, all that is required is that the person becomes, or ceases to be, a director of the corporate trustee. The corporate trustee does not change as a result. Therefore, title to all the assets of the SMSF remains in the name of the corporate trustee.   To introduce a new member to an SMSF with individual trustees requires that person to become a trustee. As trust assets must be held in the names of the trustees, this will require the title to all assets to be transferred to the new trustees when a member is admitted to or exits the fund.
Greater asset protection   Less asset protection
As companies are subject to limited liability, a corporate trustee will provide greater protection where a party sues the trustee for damages.   If an individual trustee suffers any liability, the trustee's personal assets may be exposed.
Estate planning flexibility   Extra administration and costs
A corporate trustee ensures greater flexibility for estate planning, as the trustee does not change as a result of the death of a member.   The death of a member requires there to be a change of trustee, and this gives rise to considerable administrative work and costs at an inopportune time.

The ATO also provides some helpful information here.

I have received my super fund but the bank won't open a bank account for it. Why?

It's probably best to ask the bank about this, but you will also want to make sure that you have fully read the letter that came with the documents and followed the Documentation Summary.

Also, make sure that you have either completed the ATO form, or applied online, to receive an ABN or TFN for the super fund. You have 60 days after execution to complete the ATO form (although under other regulations the ATO needs notification of the contact details and other basic information in relation to the Fund and the trustee within seven days after the establishment of the Fund, so it's best to complete and send this form within seven days - refer regulations 11.03 and 11.04 of the Superannuation Industry (Supervision) Regulations 1994 (SIS regulations)).

Once you have received the ABN and TFN and notified the ATO that it will be a regulated fund, check with the bank to be sure it does not need anything else.

I have ordered an SMSF but can't find my SPIN number - where can I get this?

The Superannuation Product Identification Number (SPIN) was used for surcharge reporting purposes.

To apply for one, the fund needed to lodge a form and pay the relevant fee. The form could be obtained from the APIR Web site (www.apir.com.au).

However, since the superannuation surcharge has been abolished a SPIN should no longer be necessary (at least for new funds).

For further information, refer to http://www.apir.com.au/public/spinDirectory.jsp

 

Is it possible for an SMSF without a corporate trustee to make both lump sum and pension payments?

An SMSF with individual trustees must have the primary purpose of paying pensions. Some practitioners argue that this in effect means that an SMSF with individual trustees cannot simply pay a lump sum benefit, and that extra paperwork is needed to evidence the pension entitlement first being requested and then being commuted.

While we do not necessarily agree with this view, it is better to err on the side of caution and have the extra paperwork in relation to the pension entitlement first being requested and then being commuted (or alternatively arrange for the SMSF to have a corporate trustee rather than individual trustees).

What happens if an SMSF breaches the investment rules?

This may potentially result in the Australian Taxation Office deeming the fund to be non-complying and this can be disastrous, as a non-complying fund's assets (not income, but assets) can be taxed at 45%.

Can an SMSF with your deed purchase business real property from its members or their associates?

The deed does not specifically state that the trust can purchase business real property from its members or their associates, but that should be fine under the deed.

Clause 11.2 provides the trustee with wide powers to invest the fund’s assets, subject to complying with superannuation laws. In this regard, the SIS Act specifically allows SMSFs to acquire business real property from related parties at market value (refer S.66(2)(b)).

You should note, however, that clause 11.4 requires that the trustee and any director of the trustee disclose any interest in any investment in the manner prescribed by the Corporations Act and superannuation law whenever they have a direct or indirect interest in the investment or may benefit directly or indirectly from the investment.

I can't see anything in my SMSF deed allowing me to pay a transition to retirement pension. Can I do this?

Transition to retirement pensions (especially before 1 July 2007) are also known as "non-commutable pensions". Clause 31.1(b) of our latest deed permits the payment of a benefit as a non-commutable pension and clause 38 sets out the conditions that apply to these payments.  Also, "pension" as defined in clause 2 of our latest deed specifically includes a transition to retirement income stream.

More information can be found on transition to retirement pensions at http://www.ato.gov.au/super/content.asp?doc=/content/74219.htm and also at http://www.ato.gov.au/super/content.asp?doc=/Content/74202.htm.

I acquired an SMSF deed in February 2007 - can I pay an account-based pension?

Although someone may have bought an SMSF deed before they were fully updated, the deeds are drafted broadly to take into account future changes.

In this case, the deeds in February 2007 specifically set out the terms and conditions of certain pensions that can be paid, but clause 27.2(d) of that deed also allows the fund to pay "any other form of pension which is acceptable to the Regulator or is within the requirements of the Relevant Law on such terms as the Trustee may determine".

Holding Redlich (the law firm that drafted the 2007 version of our SMSF deed) have provided us with the following general information about the pension clauses of that deed:

"Clause 27 provides a facility for such a lump sum benefit to be converted to an income stream benefit on terms agreed between the Pensioner and the Trustee which are within the range of outcomes possible for each type of income stream. The types of income stream benefit payable under the deed include an Allocated Pension/Non-Commutable Allocated Pension (payable under the conditions set out in clause 28) and a Market-Linked Pension/Non-Commutable Market-Linked Pension (payable under the conditions set out in clause 29) and such Defined Benefit and other Pensions as are permitted under the Relevant Law."

The new "account-based pensions" (which can be paid by super funds from 1 July 2007) are basically a type of allocated pension, with more generous minimum amounts that can be withdrawn each year (and no maximum). For more information about these, and the amounts that can be withdrawn, refer http://simplersuper.treasury.gov.au/documents/decision/html/final_decision-02.asp

and also http://www.ato.gov.au/Super/Self-managed-super-funds/Accessing-your-super/Paying-benefits/#Incomestreams and about retirement income streams generally: http://www.fido.gov.au/fido/fido.nsf/byheadline/Retirement+income+streams:+fact+sheets?openDocument

The definition and terms of payment of an "account-based pension" can be found in Regulations 1.03 and 1.06(9A) of the SIS Regulations 1994 - refer http://www.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/s1.03.html and http://www.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/s1.06.html.

 

Our current deed provides for the payment of an account based pension at clause 31.1(b) and clause 38 sets out the conditions that apply to these payments.

 

Finally, where a member is receiving an allocated pension (commenced before September 2007), we can if requested arrange for this allocated pension to be converted to an account-based pension.

Prior to pension phase, does the deed allow for separation of assets between members, and, if so what is the mechanism for this and how should it be documented to comply with the deed?

Our trust deed does allow for the separation of assets between members. Clause 11 sets out the trustee's investment powers with clause 11.2 outlining the numerous investment choices that can be made by the trustee and clause 11.5 specifically contemplating the trustee making separate investments for certain beneficiaries or members. The trustee is able to implement any number of investment strategies. One member can choose to have his/her account invested in accordance with a particular investment strategy that may for example, invest in a certain type of asset. Other members can choose to go with another investment strategy that may invest in quite different assets.

To go about separating assets the Trustee needs to prepare the appropriate investment strategies and provide members with information about the respective strategies. Where the Trustee establishes more than one investment strategy for certain members of beneficiaries, clause 20 requires the trustee to:

  • record on whose benefit the specific investments are made for the purposes of determining allocations to the member’s account; and
  • properly allocate to the applicable account credits and debits in proportion to the specific investment.

Does InterDocs's SMSF deed allow for the trustees to invest in crypto currencies such as bitcoin?

Our SMSF deed does allow for an SMSF to invest in crypto currencies such as bitcoin.

Under our current deed, refer in particular to clause 11.2(c), and also to clause 11.2(n) and the first paragraph of clause 11.2 (just before paragraph (a)).

However, it should be remembered that all investments of an SMSF are subject to the applicable superannuation legislation, in particular, to the Superannuation Industry (Supervision) Act 1993 (SIS Act) and its regulations, irrespective of the provisions of the SMSF deed.

When updating an SMSF deed, is it sufficient to keep a scanned copy of the previous deed(s), or do we need to keep originals? Ideally, we would like to just keep the soft copy of the signed deed as the reality is the originals are often misplaced or lost overtime. We just don’t know if that’s good enough to just have scanned copy for various purposes (i.e. for estate planning, proving things to ATO, in case of divorce or even court disputes). What are the requirements for this?

We are not aware of any legislative or other requirement for original documents such as trust deeds to be retained, provided that a photocopy or electronic copy of the original document is retained.  However, it is possible that a third party such as a bank may require the original document, or the original document may be required in court in the event of court proceedings, and we therefore recommend that the original document (along with copies) be retained for safe-keeping. 

It is important that trust deeds are correctly signed, witnessed and dated when the trust or SMSF is established or varied, so that all copies of the deed are copies of the original signed deed.

InterDocs provides a document storage area in each fund online that you are free to use to upload signed copies of the trust deeds for safe keeping. There is no fee for this service.

Are we required to keep hard copies of SMSF deeds, or is a scanned, soft copy sufficient?

We are not aware of any legislative or other requirement for original documents such as trust deeds to be retained, provided that a photocopy or electronic copy of the original document is retained.  However, it is possible that a third party such as a bank may require the original document, or the original document may be required in court in the event of court proceedings, and we therefore recommend that the original document (along with copies) be retained for safe-keeping. 

It is important that trust deeds are correctly signed, witnessed and dated when the trust or SMSF is established or varied, so that all copies of the deed are copies of the original signed deed.

InterDocs provides a document storage area in each fund online that you are free to use to upload signed copies of the trust deeds for safe keeping. There is no fee for this service.

When registering an ABN for an SMSF, which option should I select for the question 'What type of organisation is the applicant?'

If you have established it through InterDocs, select

  • An ATO regulated Self-Managed Superannuation Fund

Are the binding death benefit nominations (BDBNs) provided by InterDocs non-lapsing?

Yes, our BDBNs are non-lapsing (and importantly, our SMSF deed allows them to be non-lapsing).

Will Self Managed Super Funds soon allow for 6 members?

The Bill to increase the maximum number of SMSF members from 4 to 6 is before Parliament at the moment - read this article from our friends at SMSF Engine!

Has the InterDocs SMSF deed been updated to allow for up to six members?

Yes - it has! Refer to clause 9.2(f) of our SMSF deed in this regard.

This change came into effect on 1st July 2021.