To document or not to document

The importance of SMSF documentation has been emphasised in the past couple of years. Philip La Greca outlines how trustees can determine the items that require an official record.

“If a tree falls in a forest and nobody hears it, did it really fall?” or in an SMSF context, “If a trustee makes a decision and doesn’t write it down, did it really happen?”

One of the things we get asked about quite consistently is when a trustee should document a decision. This usually arises when a trustee wants to do something and is not sure if or how they need to record their actions. As usual, with most things SMSF, the answer to this question is that it depends.

We have recently had two Administrative Appeals Tribunal cases that focused on trustee documentation and record-keeping. Prescott v Commissioner of Taxation focused on whether payments were lump sums or pensions and what records of instructions existed to determine the appropriate treatment. Goulopoulos and Commissioner of Taxation covered trustee proof of advice on Superannuation Industry (Supervision) (SIS) Act compliance matters relating to a withdrawal from the SMSF meeting either the preservation or investment standards.

In both cases, the trustees did not have adequate documentation of their actions. This makes it a good time to discuss what processes are involved for the trustees of an SMSF in terms of recording decisions and actions.

There are two issues here, firstly, how do I document a decision and secondly, what decisions do I need to document? Let’s take a look at both matters.

When determining how a decision is documented, we initially need to look at what type of trustee structure exists as this will tell us what documents will govern the rules of decision-making.

If there is a corporate trustee, then the starting point will be the company’s constitution. This document will outline a range of steps necessary to make and document any decision. This may occur either at a meeting of the directors or by the passing of a circular resolution.

If the fund has individual trustees, then the guiding document will be the SMSF trust deed. Again, this document will provide instruction on whether decisions are dealt with at a meeting of trustees only or can be affirmed by passing a trustee circular resolution.

There are some key differences between these two potential methods and we will look at these factors for these different methods.

Let us start with meetings of trustees and meetings of trustee directors. The proof of these meetings is, of course, the minutes of the meeting, so what does a minute of a meeting mean? The minute of a meeting acts as a record of an event that occurred and document of the relevant issues of that event. This includes facts and items such as who was at the meeting, when it occurred, what was decided at that meeting and finally a formal sign-off by the chair of the meeting declaring the information in the document is true and correct.

So how do we hold a meeting? These are the procedures outlined in either the trustee company’s constitution or the SMSF trust deed. For example:

• some meetings, such as annual general meetings, require advance notice periods before they are held, but that doesn’t mean meetings cannot be called without notice,

• you need to determine who attended the meeting versus who was eligible to attend,

• were there sufficient people at the meeting to allow a decision to be made, that is, were there enough people to form a required quorum. If there are insufficient people at the meeting to form a quorum, then the meeting cannot make any decisions, and

• the final element is what items were raised, discussed and decisions made. All of this will be documented within the minutes.

The alternative is the use of a resolution, sometimes referred to as a circular resolution. The key difference with this is there is no requirement for a gathering of the relevant parties to occur. Instead, a document defining the recommended decision/s, or resolution, is to be circulated to all the trustees or trustee directors for approval. Some significant details to take into account are:

• each party does not need to sign the one document, but can sign separate versions of the same document, meaning they do not need to be all together at the same time,

• the effective date of the resolution is the latest date that one of the required parties signed the resolution, and

• all the signed resolutions from all the relevant parties are required to be kept.

So, the most significant difference is minutes require a meeting to occur, and at least a certain number of people must attend, whereas circular resolutions do not require a gathering but generally need all parties to agree and confirm the decision.

This brings us to the second part of the question: when do trustees need to document decisions by either method? The answer to this really hinges on the quality of other documents and procedures the trustee uses to operate the SMSF.

If we can tally up the major activities and the extent to which they need to be documented, we would be looking at the acceptance of contributions, payment of benefits and investment decisions. So, what are the documentation considerations for each of these types of actions?

For contributions there are two areas to consider – one is the receipt rules, particularly in respect of the work test, and the other is the classification of contribution types, for example, concessional versus non-concessional.

From a work test point of view, the main issue is verification the person met the work test before the trustees accepted the amount. Thankfully since 1 July 2022, this responsibility generally no longer rest with the trustees.

The classification of contributions question can generally be traced to information sources that come with the payment. If the contribution is made via SuperStream, then data is provided that will mean the trustees have a source of classification. If the contributions are personal contributions, the trustees can generally rely on the use of an ATO notice of intent to claim a tax deduction form to determine whether a personal contribution is a concessional contribution or not.

This means the principal action where additional information may be sought by the trustees will be spouse contributions. This is because there is no standard mechanism for informing the trustee the contribution is one of this type.

Other non-concessional contributions, such as downsizer and those involving small business capital gains tax and personal injury amounts, have specific ATO forms that are required to accompany them. This means the trustee does not need to request any additional information about these contributions.

Contribution reserving is another area that needs to be taken into account. Because this strategy requires the trustee to make a decision not to allocate a contribution on the date it is received, and as such is generally different from the treatment of all other contributions, there will need to be documentation showing the trustee made this change to their normal procedure. Not only will there need to be a documented trustee decision to reserve the contribution on the receipt, but a documented decision on the allocation of the contribution to the member from the reserve will also be required.

For benefit payments, the key issue is their infrequency and because the SIS rules require certain events to occur prior to a condition of release being met and an amount paid from an SMSF, the trustees need to collect that information from the members asking for a benefit to be paid. The trustees then need to make a determination the evidence they have received is accurate and meets the SIS requirements, allowing them to pay the benefit. Hence this becomes a decision that should be documented.

For pensions, of course, this is a little bit more complicated because we are generally not talking about a single payment. Here there needs to be supporting material that allows the trustee to make the initial pension payment and determines whether any subsequent payments to the member are in a pension or lump sum form.

The final element we need to talk about is investment decisions. One of the questions here is whether every purchase and sale of the investment requires documenting. The answer will be determined by other SMSF paperwork, namely the fund’s investment strategy. The more quantifiable the investment strategy content is, the easier it will be to rely on that document for future investment decisions.

Nevertheless, there are some investment decisions that are still probably worth documenting separately. These include:

• acquisition of direct property, particularly as there may need to be other documents signed on behalf of the trustees, such as rental agreements, agent appointments and service providers selected to handle repairs and maintenance,

• implementation of any limited recourse borrowing arrangement, as there would be investment strategy considerations as well as additional documents to be executed, such as custodian trust deeds and loan agreements,

• any collectable or personal-use asset that may need to have documentation relating to insurance, storage and possible leasing,

• loans by the SMSF to non-related parties, which would require a written loan agreement specifying terms and conditions applicable to the loan,

• any in-specie contribution or acquisition from a member of the SMSF or a related party as this would need to be tested against the SIS acquisition rules and possibly the 5 per cent in-house asset limit,

• any non-public asset investment to confirm it is not an acquisition from a related party or is within the permitted SIS related-party acquisition and in-house asset rules, and

• any in-house asset acquisition as compliance with the 5 per cent limit will need to be verified at the time of acquisition and how the continued monitoring of this limit will be conducted needs to be officially outlined.

So the easiest way to summarise when trustees should document decisions comes down to whether the trustee needs to let someone else know what the basis of a certain decision was or whether they can rely on other records that already exist.