Question: Hi Brett, as do many people who manage their own self-managed super funds (SMSF) – I subscribe to several information sources to keep me informed. One of the providers I subscribe to said that permissive SMSF deeds are problematic. They say that a permissive SMSF deed can prevent the trustee of a fund from paying anti-detriment payments. They also say that some High Court case means that the trustee of a SMSF cannot have any discretion in making decisions.

This doesn’t sound right to me, but then, I am no tax lawyer. Is this a valid argument? Or am I being lead up the garden path?

Platinum Member Sydney, NSW

Answer: In the modern age of online publication, it is common to find very legitimate looking publications on the internet. Many such publications are produced by reputable practitioners in their respective fields. Unfortunately, some publications are not. The problem for SMSF trustees is that they often do not know the reputation of the authors of online publications.

Unlike the more traditional form of publication of information – such as in academic journals, industry journals, industry magazines and financial newspapers – online publication does not encounter barriers like peer review, blind reviews and independent fact checking.

It is easy for people searching out information on the internet to get caught up in a flash, official looking website and assume from the appearances alone that the information is as impressive as the website.

Permissive SMSF deeds cannot pay anti-detriment payments

While I do like to keep myself busy, to be honest I became a lawyer to help people and not set them up to be a continual source of income.

The anti-detriment payments are a bonus payment made to the dependant of a deceased member of an SMSF or to the deceased member’s estate. Section 295-485 Income Tax Assessment Act 1997 (ITAA 97) says that the death benefit payment made to the dependant or estate of the deceased member can be increased by the amount of the contributions tax paid by the member during their lifetime. Such a payment results in benefits to the beneficiaries of the payment and also to the SMSF. The SMSF benefits from being able to realise a larger tax deduction for having made the bonus payment.

For example if the deceased member paid $50,000 in contributions tax during their lifetime and the SMSF trustee makes the bonus payment of $50,000 to the dependant or to the estate, the SMSF claims a tax deduction for the payment in the sum of $333,333 ($50,000 / 0.15).

Whether an SMSF deed is drafted in a regimented way to specifically address the making of anti-detriment payments or whether the SMSF deed is drafted in a permissive way to allow the trustee to make the payment as it is permitted under the ITAA 97, the end result is the same. Namely, that the trustee in fact has the power to make the anti-detriment payment providing they can make the payment without drawing from the member balances of other members. The only real difference is that in the event the law changes regarding anti-detriment payments, the regimented SMSF deed requires reviewing and amendment, whereas the permissive SMSF deed may not.

The real bone of contention regarding making anti-detriment payments is how the payments are to be funded. Regimented deeds and permissive deeds each face the same issues in that regard.

Our beloved Platinum Members discover the tricks of funding anti-detriment payments to death benefit beneficiaries.

Has the High Court killed off the SMSF Trustee’s discretion?

It has been said elsewhere that the High Court decision of Finch v Telstra Super Pty Ltd [2010] HCA 36 (the Finch case) has removed the ability of SMSF Trustees to exercise discretion when making decisions about the management of the Fund and Member Benefits. It has also been said that in the Finch case, the High Court did not look at any other documents other than the SMSF deed to determine the governing rules of the fund.

In fact, the decision made by the High Court in the Finch case has a very narrow application. The decision said that even though the wording of the SMSF deed may appear to confer discretion on the Trustee to make a decision, in certain limited circumstances the Trustee does not actually have an unfettered discretion. Rather, the Trustee’s decision making ability is impacted by obligations in the s 52 SIS Act and s 14 Superannuation (Resolution of Complaints) Act 1993 (SRC Act).

That means despite what may be contained in the SMSF deed – the discretion conferred on the Trustee is fettered by the obligation to:

and by the ability of the members of the fund to seek review of decisions made by the Trustee to the Superannuation Complaints Tribunal – if the members think the decision is unreasonable.

In the Finch case, the High Court did not decide that the principles established in Karger v Paul [1984] VR 1 – regarding the immunity of a trustee’s decisions from external review – did not apply to all decisions made by SMSF Trustees. Rather, the High Court said the principles from Karger v Paul do not apply where the decisions specifically affect the member’s entitlements in the Fund, as such decisions may be reviewable where the Trustee did not properly inform himself / herself prior to making the decision. The High Court explicitly stated that “[to] offer answers to wider questions which might arise in disputes different from the present where it is not necessary to do so would have an unsettling effect on the law which may not be beneficial.”

What does this mean for drafting SMSF deeds?

The Finch case merely confirms what most SMSF practitioners already knew. That is, regardless of what is said in the SMSF deed, the Trustee remains subservient to the overarching duties contained in the SIS Act, Tax Acts and SRC Act. Regardless of whether a regimented or permissive SMSF deed is used, or how the SMSF deed is worded, the Trustee cannot escape the duties imposed by the relevant legislation.

In my view, SMSF deeds that are drafted in a permissive way offer the Trustee of the SMSF greater flexibility and reduced ongoing costs to constantly review and maintain the governing rules of the fund. Rather than being proscriptive and stuck in a particular moment in time, permissive deeds change with the legislation by automatically adopting changes to the law.

If you require legal advice regarding what you are permitted to do as a Trustee of a SMSF, contact me, Brett Davies, on (08) 9460 5046 or Brett.Davies@civiclegal.com.au and you can have access to one of my Superannuation experts.

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