To amend or not to amend…

<I>To amend or not to amend

That is the question

Whether tis nobler in the mind to suffer the slings and arrows of the ATO

Or by amendment to quell them

To amend, per chance yet again?<I>

In this time of transition from APRA to ATO, it is appropriate to let Hamlet ask the question: Do we need to amend our trust deeds?

<I>To amend or not to amend

That is the question

Whether tis nobler in the mind to suffer the slings and arrows of the ATO

Or by amendment to quell them

To amend, per chance yet again?<I>

In this time of transition from APRA to ATO, it is appropriate to let Hamlet ask the question: Do we need to amend our trust deeds? Why Hamlet, because there is something rotten in the eyes of those who claim to amend or be pierced an ATO tax claim of non-compliance?

With apologies to poets across the world, the question can be framed: "Do the trust deeds of self managed superannuation funds (SMSF) need to be amended to accommodate new Section 17A?"

My view is no, an amendment is not required. There are other reasons to consider updating of trust deeds and now is as good a time as any, but there is no com-pulsion to do so.

How can I be so certain? Because I have looked and there is no statement that says that the trust deed of a SMSF must reflect the requirements of Section 17A of the Superannuation Industry (Supervision) Act (SIS).

The reality is that the new Section 17A is a definition section, it defines what is an SMSF. If your superannuation fund is a SMSF, then the provisions of Sec-tion 18 (Public Offer Superannuation Fund Trustee), Sections 86 to 93A (Standard Employer Sponsored Equal Representation Rules) and Section 121A (the six months go to goal penalty provision) do not apply.

From a SIS Act perspective, the SIS laws do not care what rules may exist in a trust deed for the appointment or removal of its trustees. For SMSF purposes, the rules are ignored. In other words, regardless of how they got there, new Section 17A simply asks: "Are the members also trustees and vice versa?"

But isn't there a breach of trust when the trustees are appointed inconsistent with the trust deed rules? Of course there is, if the rules say one thing and the trust actions reflect another, those actions will be in breach of the trust rules. This is a breach of trust.

Before we panic, we need to ask the question: "Is a breach of trust a problem for tax purposes?" Sometimes it can be, particularly where it is intended to procure a particular advantage. The ATO is very clear on this. If the trustees of any trust (including a superannuation fund) wish to undertake a certain ar-rangement which has as one of its consequences a reduction of taxation, the claimed tax effect will not result unless the trustee has specific power.

Can't this principle apply in the present circumstances? No, not as far as the new SMSF trustee rules are concerned. Remember, new Section 17A is a definition section, it operates to define a SMSF, it does not provide a choice.

Should I be concerned about the breach of trust? Unless there is a reason to be concerned, this is a matter for you. Difficult family relationships or members who are not bound together by family ties suggest reasons as to why it would be appropriate to have a trust deed that reflects the new Section 17A trustee ap-pointment rules. In other words, if there is any potential for conflict, you don't want the fight to include the validity or otherwise of trustee appoint-ments.

If you have this problem already, the comments below may assist. If you fear this problem, amend the trust deed to insert Section 17A compliant trustee ap-pointment principles.

If there is no other reason to require an amendment, compliance with the new SMSF rules is as simple as ensuring that all members are trustees or directors of the trustee company and vice versa. Where this is in breach of the express terms of the trust deed, there will be a breach of trust. The question then is: "So what!"

A breach of trust is only actionable by those who have a right or interest under the trust fund. Principally, this would be the members. The point is that only the members may bring an action against the trustees for breach of trust. But where the members themselves are the trustees, they have nowhere to complain.

Indeed, the decision in Hardoon vs Belilios [1901] AC118 has been quoted on very many occasions to support the principle that a beneficiary who is abso-lutely entitled to the assets of a trust may not later complain about a trus-tee's actions, if those actions were at the request of the beneficiary and would otherwise constitute a breach of trust. The principle in Hardoon vs Belilios means that the member-beneficiary completely indemnifies the member-trustees for their actions in breaching the trust. This is done by acceptance of appointment as a trustee inconsistent with the trust deed rules.

Even if the century old decision of Hardoon vs Belilios did not assist, trustees could fall back on the protection provided by the various trustee acts of the states and territories. Section 85 of the New South Wales Trustee Act (which is to the same effect as the legislation in other states) provides that a trustee who may be personally liable for any breach may be relieved by a court from that liability if that person has acted honestly and reasonably, and ought fairly to be excused. These principles apply to a breach of trust that is necessary if the SMSF is to continue to enjoy tax concessional status.

Can you become a trustee where the trust deed rules do not provide for your ap-pointment? The principles of equity are clear. A person who holds the position of trustee will not be allowed to deny that position. It follows therefore that a person or company that becomes an SMSF trustee will be a trustee even if the rules of the trust do not otherwise permit.

I assume from the foregoing that you accept the argument expressed in this arti-cle that trust deeds of SMSFs do not need to be amended to merely accommodate new Section 17A. But at the beginning, I said there was a need to amend trust deeds and that now is as good a time as any to make the decision.

As many advisers have become aware, there are a range of strategies within su-perannuation funds that can be employed to meet a whole range of superannuation objectives. These include excess RBL management, specific asset/income alloca-tion to members, flexible pension powers, the power to make joint investments with another, binding death benefits and a range of other opportunities. Many of these opportunities will give rise to tax consequences which, under the SMSF rules, will be tested before the ATO.

The ATO makes the clear point in Income Tax Ruling TR92/13. The ruling states that unless a statute or trust deed provides otherwise, the actions of a trustee can be ignored for tax purposes if those actions, which were intended to give rise to a particular advantageous tax consequence, are not supported by trustee powers. This would be because the trustee will not have had the power to do what was intended. If this is the case, the express terms of the trust deed will op-erate. That is, if the trustee wanted to allocate income or gains predominantly to one member, you had better be sure that the trust deed has the power to do so.

Reserves can only be created where a trustee not only has the power to do so but some direction as to the form, nature and purpose of the reserve. Even the sim-ple practice of allocating assets to the payment of pensions requires some form of trustee power, otherwise the ATO can argue that the principles of the unseg-regated current pension assets of the Tax Act should apply.

Binding death benefit nominations is another critical area where trustee power will be necessary if the objective is to be met. This is an extremely emotion-ally charged area, one in which I have particular views, which will be the sub-ject of another article at another time.

To amend or not to amend, that is the question.

The answer is up to you.

Peter Bobbin is a principal of the Argyle Partnership.