Last week I discussed your trust deed’s General Compliance Clause. I mentioned a brief history of these clauses and what they were initially trying to achieve. I also showed you why they’re no longer really necessary, can make your fund legally complex to operate and potentially make rules only meant for large super funds applicable to your super fund.
This week I’ll introduce the other common clause found in most Self Managed Super Fund (SMSF) trust deeds, which many of you rely on to run your fund on a day to day basis – catch-all clauses.
You need to know this
It’s paramount you and your fund administrators understand both the practical and technical limitation of catch-all language and catch-all provisions.
If you haven’t updated your fund’s trust deed for more than six months, then I’d expect you’re already relying on your deed’s catch-all clause.
What is a catch-all clause?
A catch-all provision is intended to give trustees the power to do anything that isn’t prohibited by law but isn’t specifically contained in super or other relevant laws. An example of a catch-all provision is:
“In addition to any powers expressly conferred upon the Trustee by SIS Act or by the provisions of this Deed, the Trustee has the power to do anything which is not prohibited by SIS Act”.
These catch-all clauses can be a very handy device because there are changes to the law that a suitable catch-all provision, or the appropriate use of catch-all language, will trap.
Here’s an example
For example, from 1 July 2008, the SIS Act definitions of both “spouse” and “child” were expanded. The amendment to these definitions meant the definition of a member’s “dependent” also expanded. Accordingly, the categories of persons eligible to receive a member’s death benefit increased – provided the trust deed allowed payments.
If, after July 2008, you wanted to pay a death benefit to a beneficiary who met the expanded definition of (say) spouse and your trust deed was a pre July 2008 trust deed but used appropriate catch-all language in the definition of spouse, no deed amendment would have been necessary for the trustee to make the payment.
If your deed merely replicated the pre-July 2008 definition of spouse or member and didn’t have any catch-all language in the definition, the trustee wouldn’t be able to make the payment without updating the deed.
Catch-all clauses are often not accepted by third parties (such as banks and state revenue offices and land titles offices) as a source of power for a trustee to undertake particular actions.
For example, it’s unlikely a major lender will lend to a trustee who relies on a catch-all provision as the source of the trustee’s power to borrow in a super gearing arrangement. Instead, the lender would require the trust deed to include an express power of the trustee to borrow.
Are they effective?
From a technical limitation perspective, there is argument as to whether catch-all provisions are at all effective.
A trust isn’t a legal entity – the trustee is the legal entity. The powers of a trustee don’t arise as a matter of course (unlike natural persons or companies, which are given the powers of a natural person at law). Rather, the trustee’s powers may only be derived through several sources: the Courts; by legislation; and by the trust deed. If the trustee undertakes an action that isn’t permitted by one of those sources of power, the trustee is in breach of trust.
Next week, I’ll conclude this discussion on catch-all clauses by seeing if it’s practical to rely on the Courts as a way to provide your trustee powers make any sense. I’ll also see if the super laws provide super fund trustees with sufficient power to run their fund.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.