DBA Lawyers’ lost SMSF deed service

By Bryce Figot on 29/11/2022 in ATO, SMSF compliance, SMSF deeds, SMSF strategy, Trustee education

Overview

There are many SMSFs with missing or lost deeds. A lost deed can undermine the activities of an SMSF. Being able to trace the fund’s history through the deeds (which govern how the fund is managed) is fundamental to protecting a trustee from challenge and enabling to them to do their job correctly.

However, all is not ‘lost’ if the deed chain has been broken as we outline the options to minimise the risk relating to, and consequences of, not having a complete document trail. Timely legal action can significantly reduce risk and pro-active and timely action now can result in documenting evidence to defend future legal challenges that may significantly minimise legal costs in the future.

Trustees are required to comply with the trust deed or be exposed to risk

Broadly, an SMSF is a type of trust that, like all trusts, is ‘run’ by its trustee. One of the most fundamental responsibilities of a trustee is to be familiar with and comply with the terms of the trust, as varied from time to time.

The trust deed is the document that sets out the terms of that trust (and is also sometimes referred to as the governing rules). Therefore, without a trust deed, an SMSF trustee will be exposed to considerable risk of penalties and legal risks. Numerous third parties will want to review the deed including accountants, financial advisers, auditors, lawyers, the ATO, banks, investment bodies and (potentially most important of all) beneficiaries upon a death benefit dispute.

A trustee that is unable to prove the fund’s entire deed history through an uninterrupted chain of deeds, is vulnerable to legal challenge. Chalenges could be made that they are not the current trustee (eg, if a change of trustee deed is lost) or that they are not following the ‘current’ governing rules of the fund and do not have the power to make certain decisions (eg, that a deed update was not properly adopted, or is lost).The importance of prior deeds

Almost all SMSF strategies and arrangements rely on a ‘firm foundation’ being the trust deed and governing rules. Like a house, unless you have a firm foundation, the house may prove shaky and be blown down by rough weather.

Having a robust deed is very important for many SMSF strategies including pensions, binding death benefit nominations (BDBN), and determinations of who eventually gets control of the fund on death, separation of a relationship, and in a dispute. Thus, it is important to ensure the SMSF’s governing rules provide a firm foundation for every SMSF.

To rely on current governing rules an SMSF’s prior deeds, rules, and changes of trustee all need to be demonstrably validly prepared, witnessed, executed, and, if necessary, stamped, in compliance with prior variation powers, relevant consents, and appropriate legal formalities. All these formalities must have been complied with in the document trail otherwise the SMSF’s governing rules may be invalid and ineffective.

What if my deed chain appears to be broken?

All is not lost if the deed chain has been broken and, steps can be taken to strengthen the trustee’s current standing and, using the previous analogy, rebuild the Fund’s foundation.

Tracking down a lost deed

Where there is a lost deed, an exhaustive search should be undertaken to find it or gather any evidence that may relate to the existence and contents of the prior deed. Such evidence may include a copy of the lost deed, a reference to it or decisions evidently made pursuant to it. Some suggested ways to locate a lost deed include:

contact all prior and current accountants, financial advisers, auditors, lawyers, the ATO, revenue offices, banks and investment bodies that may have been provided a copy;
contact the deed supplier to determine whether they have a copy of the deed or the standard template deed that would have been supplied at the relevant time; and
check every place where documents may have been stored over the years (including any filing cabinet, safe, bank deposit box, etc).

Confirming the Governing Rules in court

Ideally, an approach should be made to the relevant Supreme Court seeking a declaration that the trustees can continue to administer the fund on the basis of the available document trail. If successful, this will give the trustee a clear idea of what the governing rules are, what is within and outside their grant of power and protect them from challenge on the basis of the lost documentation. However, practically many SMSF trustees are reluctant to spend the considerable time, money (typically exceeding $30,000 + GST) and effort required to approach the court and endure the stress that this entails.

Addressing the issue through new documentation

DBA Lawyers frequently provides advice on the various options and assist with any written advice or documents that you may require. Several popular options include:

A. SMSF Deed update where there is a lost prior deed

This service is offered in conjunction with our SMSF deed update service. When you order an SMSF deed update you can notify us that you cannot provide the most recent deed (ie, it’s a ‘lost deed’) and we can provide new governing rules and add additional parties to the deed to minimise future risk.

A trustee might choose this option as it might bind the other signatories to the agreement that even through there may have been a previous break in the SMSF’s chain of documents, all parties are content to move forward with the current trustee and the new governing rules. This approach might reduce the ability of the other signatories from contesting this point later on, however it does not completely remove the possibility, nor prevent other third parties contesting the matter later on (eg, beneficiaries who did not sign the deed in a death benefits dispute).

This option is relevant where, despite exhaustive searches, no evidence of the lost deed has been located. If there is evidence relating to the lost deed, then option B can be considered.

B. Deed of confirmation to confirm a lost deed

This service is appropriate where there is a lost deed but there may be evidence relating to the deed that you would like confirmed, eg, you have a standard template SMSF deed or governing rules supplied by the supplier who supplied the lost deed around the time the lost deed was supplied.

The deed of confirmation, among other things, confirms that the trustee, members and any other relevant parties agree that the standard template SMSF deed or governing rules was the deed that was previously duly executed and approved by the relevant parties and agree that they are bound by that standard template as the best evidence of the terms of the trust deed (ie, governing rules of the SMSF).

Deciding on the best option for you

Naturally, our lawyers are well placed to review your existing documents and to provide advice and tailor a solution that best suits your needs and risk appetite.

SMSF deed history review

DBA Lawyers also offers a ‘bespoke’ service to clients who are not sure what action is required or if the trustee is open to challenge. This is called the SMSF Deed History Review and includes a review of the deed of establishment, any subsequent deeds of variation and deeds of change of trustee. We review the full deed history of the SMSF to determine if there are any issues that require remedial work and ensure the SMSF’s deed history stands up to outside scrutiny or challenge.

Deciding when to act

Remedying any issues in a timely manner is often far more cost and time effective than being exposed to legal challenge, ATO scrutiny, or other risks and uncertainty later. Also, banks and financial institutions are very strict on seeing a full and valid document trail before they lend to an SMSF trustee or undertake certain other transactions. Addressing issues early is also important to provide valid and legally effective BDBNs and automatically reversionary pensions. If any further work is recommended, we provide an estimate for this work in our report.

Conclusions

Having a complete deed document trail is important to support each SMSF’s legal position. Without one, many strategies and transactions can be open to challenge and trustees exposed to considerable risk. SMSF trustees should review and take timely action if there any lost deeds or key documents. Legal advice should be obtained from an SMSF lawyer and non-qualified suppliers should be avoided.

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