Case study — how a good SMSF deed ‘saves the bacon’ of clients and advisers

Meet Graeme

Graeme is a 56 years old builder. He has been married and divorced and has adult children from that marriage. He now has a second spouse. Graeme and the second spouse are members of an SMSF together. They are also the trustees of the SMSF.

His SMSF has acquired vacant real estate. The real estate is not being leased out, however, in due course Graeme believes it will be rezoned and will experience significant capital appreciation.

His SMSF has engaged in significant share trading activities.

Graeme wants to provide building services to his SMSF and be paid for doing so.

Finally, when he dies, he wants to ensure that his SMSF benefits are paid to his children from the previous marriage.

Easily done?

None of Graeme’s wishes are particularly rare or unique. But how difficult are they to implement in practice with 100% legal certainty?

The SMSF deed plays a crucial role. However, few deeds provide all of the powers to allow Graeme’s wishes to be ‘safely’ implemented. This is because:

• Unleased land — the default position for all trusts (including SMSFs) is that trustees are not allowed to hold unleased land. This is a concern because upon Graeme’s death, his children might sue his second spouse as continuing trustee for the market value of the rent the SMSF would have received had the land been leased, regardless of any capital gain. Luckily, the deed can alter this and thereby permit trustees to ‘land bank’ without deriving rent. However, few SMSF deeds expressly permit this.
• Share trading — there is a greater recognition that share trading constitutes a business (see, for example, Taxpayer and FCT [2011] AATA 545). Further, there is a greater recognition that SMSFs can carry on a business. However, the default position is still that no trustee can carry on a business unless the deed permits them to do so. Again, few SMSF deeds expressly permit this.
• Remuneration of trustees — the legislation has changed and now if SMSF trustees are remunerated in certain circumstances the fund won’t cease being an SMSF. But, the legislation does not say that trustees can be paid. Again, it only says that if SMSF trustees are remunerated in certain circumstances the fund won’t cease being an SMSF. The default position is that trustees can not be paid. The deed can alter this to permit trustees to be paid. However, few SMSF deeds expressly permit this.
• Payment of death benefits to children from previous marriage — a binding death benefit nomination power in an SMSF deed is pretty common these days. Graeme might simply make a BDBN in favour of his kids. But what if he doesn’t want to tell his spouse (ie, his co-trustee) during his life? Will this invalidate the BDBN? Few SMSF deeds expressly permit a BDBN to be valid without providing it to all the trustees to approve.

Is the solution a deed update?

The SMSF trustees and their accountant, Billy, decide that a deed update is needed to address all of the above.

The accountant however is mindful that he does not want to be seen to be providing legal services. This is because non-lawyers who do so can suffer significant penalties. Billy notes the case of Legal Practice Board v Computer Accounting and Tax Pty Ltd [2007] WASC 184. Here an accountant obtained a trust deed template from the internet where the template had been written by lawyers. The accountant populated the template. The Supreme Court of Western Australian held that ‘the provision of the trust deed involved the [accountant] performing, carrying out or engaging in any work in connection with the practice of law.’

Accordingly, they want to get not just a top of the range deed but they also want it drafted by lawyers to ensure it is valid and protects them.

DBA Lawyers offers the full solution

DBA Lawyers is Australia’s largest dedicated SMSF law firm. Their SMSF deeds cover all of the issues listed above and much, much more. They tailor their legal documents so that there is no risk of advisers being accused of providing legal services.

Advisers who order documents from DBA Lawyers are welcome to contact DBA Lawyers for preliminary discussions regarding any technical queries.

Integration with Class Super

Class users can access quality products and services, including DBA Lawyers, by logging into the Class Shopping Cart saving time and further increasing efficiencies.

Through the Class Shopping Cart you can access a range of services available from DBA Lawyers including requesting new SMSF & Corporate Trustee, New SMSF (individual trustees or ‘BYO’ corporate trustee), SMSF Deed Update and Lost SMSF Deed. As a Class user your application will be pre-filled with the SMSF data required and can be submitted to DBA Lawyers.

Class Super, the leading cloud based SMSF administration solution, is an innovative and market leading on-line financial market solution, comprehensively catering for the accounting and advisory market. Launched mid-2009, it is the fastest growing SMSF administration solution in Australia.

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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.