Recording all of it

One of the key components to ensure sound SMSF compliance is thorough record-keeping. Smarter SMSF technical and education manager Tim Miller details the documentation practices trustees need to take into account.

Running an SMSF represents a significant responsibility for trustees, demanding meticulous attention to documentation to ensure compliance with legal, regulatory and financial requirements. Proper SMSF documentation is not only crucial for the smooth operation and governance of a fund, but also for protecting trustees from potential legal liabilities and ensuring a fund’s long-term sustainability. This article summarises key aspects of SMSF documentation, including the necessity of regular reviews, essential documents, governing rules, best practices and the documents that frequently cause conflicts.

The significance of documentation

Documentation within an SMSF serves multiple purposes. It provides a clear framework for the fund’s operations, ensuring all actions are compliant with the Superannuation Industry (Supervision) (SIS) Act 1993 and associated regulations. Additionally, it safeguards trustees by documenting decisions and processes, thus providing evidence in case of disputes or audits. Comprehensive documentation also ensures the fund’s strategies, especially regarding investments and estate planning, are clear and executable.

Key documents

Key documents every SMSF must maintain include:

• Trust deed: The trust deed is the foundational document of an SMSF. It establishes the fund’s framework, detailing trustee powers, member rights and operational guidelines and it must comply with the SIS Act. Regular updates are necessary to align with legislative changes.

• Investment strategy: A comprehensive plan detailing the fund’s investment objectives, risk management strategies, diversification strategies and liquidity needs taking into consideration the personal circumstances of the members. This document must be reviewed regularly to ensure it remains relevant.

• Minutes of meetings and resolutions: Records of trustee meetings and decisions made that are crucial for transparency and accountability.

• Financials statements: These include the operating statement, statement of financial position and notes to the accounts. They provide a snapshot of the fund’s financial health and performance.

• Tax returns and audit reports: Annual returns submitted to the ATO and independent audit reports verifying the fund’s compliance with regulatory requirements.

• Member statements: Annual statements that provide details of each member’s account balance, contributions and benefit payments.

• Death benefit nominations – binding or otherwise: Documents directing how a member’s benefits should be distributed upon their death. These need to be regularly reviewed and compliant with the trust deed to be valid.

• Pension documents: Formal details pertaining to the commencement and management of pensions, including terms and conditions agreed upon by the trustee and member.

Trust deeds

The governing rules of an SMSF are encapsulated within its trust deed, a legal document that outlines the powers, duties and obligations of the trustees. The trust deed must be appropriately drafted and updated to reflect any changes in legislation or fund circumstances.

The trust deed sets out how the fund is to be operated and managed. It must align with superannuation laws, including the SIS Act and the SIS Regulations 1994. The deed should cover essential provisions such as:

• Establishment date and definitions: An official record of when the fund was set up and clear definitions of common terms used throughout the deed and within the SMSF sector to assist trustees in their understanding.

• Compliance clause: A clause stipulating the deed must be read in conjunction with superannuation laws and, in case of inconsistencies, the law takes precedence.

• Trustee and member details: Procedures for appointing and removing trustees and members.

• Operational rules: Guidelines for fund operations, including how meetings are conducted, voting procedures and how decisions are made.

Statutory obligations

Key statutory covenants under sections 52B and 52C of the SIS Act are taken to be included within the governing rules, whether stated or not and include:

• acting honestly in all matters concerning the fund,

• exercising skill, care and diligence in managing the fund,

• acting in the best financial interests of members,

• formulating and giving effect to an appropriate investment strategy, and

• keeping accurate and accessible records.

Further, it is incumbent upon the trustees to inform the ATO of significant changes and events as required by law.

Trustee liability

Trustees can be held personally liable for any loss suffered by the fund due to breaches of trust or negligence. Therefore, it is crucial to ensure all actions are well documented and compliant with the governing rules and superannuation laws. In the event of a legal dispute, comprehensive documentation serves as evidence of the trustees’ adherence to their duties.

Pension documents

Pension documents are critical for outlining the terms and conditions of income streams paid from the fund. Proper documentation ensures pensions are managed in compliance with legal requirements and fund rules.

Pension documents should cover:

• Start date and reversionary status: Clear information on when the pension starts and if it reverts to another individual upon a member’s death.

• Terms and conditions: Detailed terms agreed upon by the trustee and member, ensuring alignment with the trust deed.

• Commutability and reversionary rules: Guidelines on whether the pension can be ceased and the rules governing reversion actions.

Product disclosure statement

A product disclosure statement (PDS) is an essential document for SMSFs, particularly when a member transitions from the accumulation phase to the pension phase. The Corporations Act 2001 mandates a PDS must be issued under specific circumstances to ensure members are fully informed about the products and services they are receiving.

PDS exemptions

A limited exemption exists if there are ‘reasonable grounds’ to believe the member has received, or has access to, all the information the PDS would typically contain under section 1012D of the Corporations Act. This exemption applies if the member is already sufficiently informed about the pension product and its terms.

One of the significant risks is making decisions for the client without issuing a PDS. The default position should be that the client’s understanding, as a member, is typically insufficient without a PDS. Therefore, it is generally recommended a PDS be provided to ensure full compliance and transparency.

Contents of a PDS

To be effective and beneficial, a PDS should include comprehensive information that helps the member understand how a pension will operate. Key elements to be covered include:

• type and term of the pension,

• administrative, tax, legal and actuarial considerations,

• advantages and disadvantages,

• commutability and reversionary status, and

• estate planning implications.

The final point above is critical as it is important to know how the pension integrates with the member’s overall estate planning strategy, including details on binding death benefit nominations (BDBN) and reversionary pension provisions.

Practical considerations

There are a number of practical considerations when drafting pension documents.

• Agreement before commencement: Trustees and members must agree to the terms and conditions of the income stream before it commences.

• Flexibility in documentation: Pension documents should allow flexibility in dealing with benefit payments, ensuring compliance with pension standards.

Best practices for SMSF documentation

The following is a non-exhaustive guide to having good SMSF documentation.

Regular reviews and updates

Given the dynamic nature of superannuation laws, it is essential to regularly review and update the trust deed and other governing documents. Over time, circumstances and details may change, necessitating updates to ensure all records are accurate and complete. Regular reviews help identify and mitigate potential risks associated with outdated or incomplete documentation.

Accurate record-keeping

Maintaining accurate and accessible records is fundamental. Using SMSF administration software can help streamline the recordkeeping process and ensure all documents are stored securely and are easily retrievable.

Electronic documentation

The Electronic Transactions Act 1999 allows certain SMSF documents to be signed and stored electronically. However, some laws, like the SIS Act, still require paper forms or wet-ink signatures for specific documents. Trustees must ensure electronic records are verifiable, accessible and compliant with ATO requirements.

Document retention

The ATO mandates specific retention periods for SMSF documents to ensure all records are available for audit and compliance checks. Key retention requirements include:

• 5 years: Applicable to accounting records, annual returns and documentation related to benefit payments.

• 10 years: Relevant for minutes of trustee meetings, records of changes in trustees, trustee declarations and member consent forms.

Failure to retain documents for the required periods can result in penalties and compliance issues.

Consistency and clarity

Consistency in documentation is key to avoiding conflicts and misunderstandings. All documents should be clear, concise and aligned with the fund’s governing rules. For example, investment strategies should explicitly state the objectives and risk management policies of the SMSF, avoiding generic or vague statements.

Professional advice and support

Engaging professional services for legal, financial and compliance advice can help trustees navigate the complexities of SMSF documentation. Legal professionals can assist in drafting and updating the trust deed, while accountants and financial advisers can provide guidance on compliance and investment strategies.

Estate planning considerations

Effective estate planning is critical for SMSFs, particularly concerning BDBNs and reversionary pensions. Trustees must ensure these documents are valid, up to date and aligned with the fund’s trust deed. The High Court decision in Hill v Zuda emphasised the importance of adhering to the trust deed’s requirements for BDBNs, underscoring the need for meticulous documentation.

Conclusion

Regulatory bodies, including the ATO and the Australian Securities and Investments Commission, are placing increased scrutiny on SMSFs, particularly regarding compliance and documentation. Trustees must be prepared for more rigorous audits and inspections, emphasising the need for comprehensive and accurate documentation.

Advancements in technology, particularly in SMSF administration software, offer significant opportunities for improving documentation practices. Automated document generation, digital signatures and secure cloud storage can enhance efficiency and accuracy.

Effective SMSF documentation is the cornerstone of a well-managed and compliant fund. Trustees must prioritise the maintenance of accurate, comprehensive and up-to-date records to ensure compliance with superannuation laws, protect themselves from possible legal actions and facilitate the smooth operation of the fund. By adopting best practices in documentation, engaging professional advice and staying abreast of legislative changes, trustees can safeguard their SMSF’s future and ensure it meets the needs and expectations of its members.