The question seems simple enough — what should you do when the trust deed for a self managed superannuation fund (‘SMSF’) is lost? The answer to this question is becoming increasingly important as more and more trust deeds are being misplaced or lost.
This article offers a solution that may be appropriate for some SMSF trustees who lose their trust deed. However, it begins by examining the preliminary question of why a trust deed is even important in the first place.
Does an SMSF require a deed?
Broadly, an SMSF is a type of trust that, like all trusts, is ‘run’ by its trustee. One of the most fundamental responsibilities incumbent on a trustee of a trust is that they obey the terms of that trust. Ordinarily, the trust deed is the document that sets out the rules and terms of that trust (and is also sometimes referred to as the governing rules).
Therefore, without a trust deed, an SMSF trustee cannot say that they are abiding by the terms of the trust, as they cannot know what those rules or terms are. Additionally, other parties who may want to rely on specific powers in the deed (for example, banks) may not be able to.
If a trust deed cannot be found, this does not necessarily mean that the trust deed has been lost forever. Accordingly, SMSF trustees should exhaust all avenues to locate it, including:
- contact all accountants, auditors, financial planners and financial institutions who may have seen, or have a copy of, the trust deed;
- contact the deed supplier to determine whether they retained the original trust deed or even an unexecuted copy; and
- check the place where all other financial documents end up (this may be with an advisor or in a safe deposit box or a cupboard/drawer).
But what if it is still lost? Unfortunately, there is little guidance on what seems to be a common problem.
Theory vs practice
In a perfect world, an approach should be made to the relevant Supreme Court seeking an order regarding the administration of the SMSF. However practically many SMSF trustees are reluctant to spend the time or money required to approach the court.
Accordingly, many trustees make a commercial decision to bear some risk and either wind up the SMSF or continue without the deed. This is especially likely for lower value SMSFs or SMSFs where the risk of dispute is believed to be relatively low.
However, a better solution may exist.
The Supreme Court of New South Wales may have provided a better solution in the 2004 case of Re Bowmil Nominees Pty Ltd  NSWSC 161 (‘Bowmil’).
The decision suggests that irrespective of what the existing or lost deed requires, if all of the members and beneficiaries of the SMSF are adults of sound mind and execute a deed varying the rules of the SMSF, that variation will be effective.
However, several questions remain unanswered.
Facts of decision
The facts of Bowmil are as follows:
- the Williamson Superannuation Fund (‘Fund’) was a sole member superannuation fund;
- the sole member of the Fund died;
- the governing rules of the Fund required that any Fund member’s death benefits be paid by way of lump sum (or more particularly the governing rules did not allow death benefits to be paid by way of pension);
- the beneficiaries of the deceased member of the Fund wished to receive the deceased member’s benefits by way of multiple pensions and sought to vary the governing rules of the Fund;
- in order to implement the above variation, the existing governing rules of the Fund required the approval of a party defined as the ‘principal employer’;
- the principal employer refused to approve such a variation of the trust deed; and
- accordingly, the trustee of the Fund applied to the court to vary the trust deed by deleting the provision requiring the principal employer’s approval.
In Bowmil, Hamilton J accepted that the court did have an inherent power to vary the governing rules of the Fund. However, he chose not to exercise the power.
Instead, he noted that where the beneficiaries, who are all ascertained and sui juris (of sound mind), agree to a variation, there is no need for the court to interfere. The judge considered this to be the corollary of the rule from Saunders v Vautier which — at the risk of oversimplifying — requires a trustee to vest (or transfer) all of the assets of a trust if all of the beneficiaries call on them to do so.
Accordingly, the trustee of the Fund presented a new set of governing rules to Hamilton J, to which the judge stated:
As the new trustees will be the beneficiaries and they are all sui juris, this is entirely appropriate … furthermore, it has now been made plain that the ongoing beneficiaries (and proposed trustees) have received the … amending deed and had it explained to them. It also shows that they have had advice concerning it and consent to the amendment of the existing provisions governing the trust into that form. I am now prepared to give relief.
Issues with the decision in Bowmil
However, care must be taken before relying on the decision in Bowmil.
Firstly, Hamilton J noted that all of the beneficiaries must be ascertained and sui juris. While this may seem like the simple exercise of listing the members and their dependants, the reality is that the potential recipients of a deceased member’s benefits can include a vast list of beneficiaries, including grandchildren and other extended relatives of fund members.
The next and more technical problem with the decision from Bowmil is that the judge accepted that all beneficiaries of a trust could vary its terms as a necessary corollary of the rule from Saunders v Vautier. However, this assertion may not be as certain as Hamilton J stated.
Finally, many SMSF trust deeds generally contain certain conditions that prevent a beneficiary from having absolute, vested and indefeasible interests in the fund. This issue was not expressly canvassed in Bowmil, which presents some uncertainty for an application of Bowmil to a lost SMSF trust deed.
Despite the issues with the decision in Bowmil, it still provides a potential solution. If a client is happy to accept a degree of risk, relying on this decision can form part of a practical course of action.
Under the Bowmil approach, a carefully drafted deed of variation could implement new governing rules. The parties to the variation should include as many of the beneficiaries to the fund members as possible. Beneficiaries should include everyone who could theoretically one day receive a benefit under the SMSF, not just the members.
Naturally, this potential solution does not resolve all of the issues discussed in this article (and some others that have not been discussed). However, it does provide a better basis than proceeding without a trust deed at all!
Losing an SMSF trust deed can cause significant problems. Accordingly, an SMSF trustee should make every attempt possible to find the deed.
Ideally, if the trust deed cannot be found, an approach should be made to the court. However, such an approach will involve significant costs and efforts, which many SMSF trustees are unwilling to accept.
A practical solution from Bowmil is for the SMSF trustee to arrange for a carefully drafted deed of variation to be executed with as many beneficiaries as practical added as parties to the deed. This approach is typically the most practical option available, especially where there is a low likelihood of dispute. However, it must be noted that this is not a perfect solution and trustees utilising this solution must be aware that they are assuming some risk.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.