Dear Members,

SMSF deeds varied via web. The risks!

1. Introduction
The rapid increase in the number of self managed superannuation funds (‘SMSFs’) in recent years has seen significant growth in demand for services that enable the updating of deeds. This has led to some providers offering online production of superannuation deeds of variation (‘SDVs’).

Essentially, these web based services enable advisers or their clients to input the data into the provider’s website, and produce the necessary documents (deeds, resolutions, etc) electronically. Broadly, the SDV service enables the adviser to make all decisions regarding how to comply with the variation clause, what parties need to be bound by the deed and otherwise amend the documents as they see fit. The documentation is effectively prepared by the adviser and the adviser is therefore responsible for the documentation. Any legal sign-off merely relates to the precedent before any changes are made. (Note that this is different from merely placing an order online where the supplier produces the documents for you using their own staff and resources and the adviser does not undertake any work on those documents.)

While this facility may initially appear attractive, care must be taken, as such services carry a number of significant risks. Advisers who are not legally qualified with a current legal practicing certificate are taking substantial risks. Such advisers could also be placing their SMSF clients at considerable risk and in breach of the law.


2. Legal Services
A person can only undertake legal work for reward if they are an Australian Legal Practitioner. The penalties for breach of this prohibition are substantial, eg, in Victoria a penalty of two years imprisonment applies (see section 2.2.2(1) of the Legal Profession Act 2004 (Vic).

Legal work includes the preparation of a document which affects legal rights and which is tailored to the particular needs of another person. In our opinion, the preparation of SDVs satisfies this definition. An SDV imposes duties on the trustees, regulates the rights of beneficiaries and possibly other parties. Furthermore, the deed defines the relationship between the trustees and members, and therefore affect their legal rights. It is clear that the producer of the SDV documents over the web is the adviser who is preparing the documents. The preparation and tailoring of an SDV for a particular SMSF is substantially different to the insertion of the names of the parties to a standard legal form.


3. Adviser Limits
The various professional bodies in Australia have attempted to address the issue of members engaging in legal services, and the associated consequences. Their responses have been as follows:

Accountants who are members of the two major Australian accounting bodies (ie, the Institute of Chartered Accountants and CPA Australia) are prohibited to prepare legal documents under rule February 2007

C.3 of their Professional Code of Conduct, which states that ‘members must not carry out work which is required by law to be performed by legal practitioners’.

A member of the Financial Planning Association (‘FPA’) commits an offence under clause 3.3(j) of the FPA’s Constitution if the member ‘is found guilty of any breach of the law punishable by imprisonment of more than six months’.

Members of other professional bodies should carefully inspect their rules of conduct.

There are sound reasons why these professional bodies have tried to limit what their members are competent at doing and prohibiting conduct that others are qualified to do. In particular, many advisers use the web based system to undertake SDV work and generate income from what is, in our opinion, clearly legal work.


4. Insurance Cover
Most professional indemnity (‘PI’) insurance for advisers (other than lawyers) excludes cover for services that a lawyer must undertake. Therefore, when an accountant, financial planner or consultant provides, eg, an SDV that constitutes legal work, they may void their PI Insurance cover and find themselves exposed to beneficiary claims without the benefit of insurance.


5. Consequences of an invalid SDV
If an SMSF, or its trustees, become subject to a legal or regulatory action, then the deed will be closely scrutinised. Typically, legal action arises in such instances as death of a member, divorce or regulatory audit. There have also been many disputes between family members and business partners in respect of SMSFs that depend on the validity of the fund’s deed.

Like a home, a deed requires a firm foundation. The prior document history is highly relevant. If there are any gaps, missing consents or incorrect interpretations, then the SDV may be void. Where a deed is deemed to be void, then it is an entirely irrelevant or a wasted exercise. In this case, the trustee’s powers will flow from the prior deed. Flow on consequences that can occur include:

• an SMSF has obtained a stamp duty exemption on the transfer of dutiable property to the fund provided certain clauses in the deed were inserted. However, the person varying the deed replaced the deed without retaining the specific stamp duty clauses and a substantial stamp duty liability arose from the SDV;

• a binding death benefit nomination that was drafted to ensure that a member’s death benefit was paid to his children, rather than to his second spouse, was void as the variation did not have the employer’s consent as required by the variation clause in the prior deed;

• a defined benefit pension (‘DBP’) strategy designed to obtain RBL compression was not effective as the ATO discovered the deed was lacking sufficient power to pay that type of pension. The Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’) are quite prescriptive as to what must be included in the governing rules of a fund;

• the ATO consider that any amendment to a term or condition of a DBP creates a new pension with a revised RBL determination (reflecting the current market value of the assets supporting that pension). The SISR prohibits the commencement of a DBP in an SMSF after 31 December 2005 and care must be taken not to impact any term or condition of a DBP when undertaking an SDV. There are many deed suppliers who simply delete all prior deed provisions (including any DBP provisions) and install a new deed template. This course is likely to give rise to a change of the terms and conditions of any DBP and, in the ATO’s view, result in the commencement of a new pension (which cannot be a DBP after 31 December 2005 in a SMSF) thereby giving rise to an RBL reassessment;

• DBPs commenced prior to 20 September 2004 may have benefited from 100% assets test exemption for social security purposes. Care must also be taken to ensure that an SDV does not jeopardize this favorable status; and

• an incorrectly performed SDV which is invalid will result in any strategy undertaken by the trustees on the basis of that deed (eg, reserving) being invalid.

6. Have You Been Misled?
In view of the serious risks discussed above, it seems misleading to suggest that undertaking an SDV via the web is simple, quick and cost effective. Web suppliers fail to point out the serious risks involved and, in our opinion, representations that an SDV can be undertaken by nonqualified persons is in contravention of the Trade Practices Act 1974 (Cth).

Furthermore, web based suppliers of SDVs may also be liable in negligence if they fail to recommend that users obtain legal advice to ensure that any documents created by the user are valid. Users themselves are also likely to be negligent should any document not be valid as measured by the competency of a qualified lawyer who would typically undertake such work.


7. Conclusions
While the provision of online SDVs may initially appear to be a simple means by which the deed of an SMSF can be updated, there are numerous serious risks involved with this method. This could expose users to substantial risks, undermine trustee actions and have many long lasting consequences

Web based suppliers should be required to disclose these risks to their users (typically advisers) and the ultimate consumer (the ‘mum-and-dad’ SMSF). This disclosure should ensure that users can make an informed decision.

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DBA Bulter provided this memo to NTAA Corporate as a general guide only. It is no substitute for expert advice.


Please contact us on 1800 700 666 if you have any queries or visit www.interprac.com.au/corporate

Yours sincerely

Kerry Jones
NTAA Corporate Manager
 

C/- InterPrac Limited
NTAA Corporate
Level 3, 29-33 Palmerston Crescent
South Melbourne, VIC 3205
Phone: 03 9209 9799, OR Free Phone: 1800 700 666
Fax: 1300 361 816 (NB: this fax number will safely direct your order straight to NTAA Corporate's email - the best option)
Email: ntaacorporate@interprac.com.au 
Web: www.interprac.com.au/corporate 

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