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Super trust deeds a holiday must read


A reality of do-it-yourself superannuation is that few trustees are aware how important it is for them to have a better understanding of their fund’s trust deed than they actually have.

While every trustee must sign the deed that permits their fund to operate, not many are aware they have a legal duty when they become the trustee of any trust – including a super fund – to know the terms of the trust, says Bryce Figot, a director of DBA Lawyers, which specialises in DIY fund trust deeds.

In other words, he says, they have a legal obligation to read the trust deed and to be aware of what it contains.

For those who have treated this responsibility lightly, the good news is that it can be corrected at any time by simply picking up the trust deed and reading the governing rules.

All you need is some time, which could be during a holiday break.

Not that you will necessarily find it riveting reading, or that it will replace the novel on your bedside table, says Suzanne Mackenzie, a partner with DMAW Lawyers in Adelaide.

DIY trustees reading their deeds won’t put any popular novelists out of business.

What they can gain, she says, is familiarity with what the deed contains and an appreciation of the concept that trust deeds govern what you can and cannot do in a DIY super fund.

When starting to read a trust deed, it can be handy to know what to expect and how to approach the exercise.

One thing you should expect is to be able to understand it.

Although a trust deed is technically a legal document that outlines how the fund works, any interested member or trustee should be able to read and understand it if they want clarification about any major issues that have to do with the running of their fund.

That said, it is a legal document so a certain level of legal terminology and jargon should be expected but any explanations and definitions of special terms should be understandable.

One challenging aspect of trust deeds is the need to refer to definitions or other rules mentioned earlier in order to fully appreciate what you are reading.

While they should be reader friendly, they will, nevertheless, require some effort.

The most useful deeds are divided into sections that can act as a reference guide for answers to the important questions about DIY super without having to refer to the hundreds of pages of official rules and regulations.

Trust deed checklist

One way to test this legal document is to try to find the following in your fund’s deed:

■ Rules that explain who can be a trustee, what a trustee can and can’t do, and what is expected of them, how a trustee can retire and a new trustee be appointed, and how their decisions should be made and recorded;

■ A description of who can be a fund member and how they can join the fund;

■ An explanation of what a fund can accept in the way of contributions;

■ Rules that explain the preparation and implementation of an investment strategy, including the different investments that are allowed;

■ Rules that detail the power that trustees have to borrow money;

■ An outline of the way benefits can be taken in various forms such as lump sums and pension benefit arrangements, and how they are required to be calculated;

■ What should happen when a member becomes disabled or dies. How any death benefits can be distributed to beneficiaries; and

■ How a fund can be wound up when it has reached the end of its useful life.

All these various aspects of super should be able to be found in the deed by trustees reading through them.

A trust deed, says Figot, should answer such questions as what happens if a member loses the mental capacity to be a trustee and how the fund will continue. As the answer will depend almost exclusively on what the trust deed says, the important thing is to be comfortable with this.

As far as a fund’s investment strategy is concerned, says Figot, trustees need to be aware rules that allow a fund to engage in strategies like borrowing to invest must be specifically permitted by the trust deed.

Many trustees incorrectly assume that the Superannuation Industry Supervision (SIS) legislation allows DIY funds to borrow to invest. What the legislation actually states is that borrowing by DIY funds is prohibited unless it is a limited recourse borrowing arrangement that limits the super assets that can be offered as security for any loan to the specific asset that is bought with the loan. No other fund assets can act as security.

According to Figot, saying a super fund can borrow to invest is quite different to saying a prohibition on borrowing does not apply where a limited recourse loan is involved.

So the way this is expressed in the fund’s trust deed is very important; banks have been known to reject applications for loans to buy property because they are not happy with the trust deed wording.

Banks have also been known to ask for specific wording that states a fund can operate a bank account as distinct from wording that incorporates a bank account in a general way.

There are banks that expressly want to see a DIY fund’s scope to operate a bank account clearly identified.

Posted by John Wasiliev - Australian Financial Review on 27th December, 2013 | Comments | Trackbacks
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