SUPERANNUATION FUNDS

SUPERANNUATION FUNDS. I note that you provide two different types of superannuation funds. Can you tell us what the differences are between them? 2. Are the deeds updated for the new legislation? 3. Why do all of the members have to be trustees? 4. I heard that if a child is a member, the child does not need to be a trustee. Is this right? 5. What does the Principal do? 6. Can the trustees and members use the accountant s address instead of their residential address? 7. Are there any major pros and cons of having a corporate trustee or individuals? 8. I have received my super fund but the bank won t open a bank account for it. Why? 9. I have ordered an SMSF but can t find my SPIN number where can I get this? 0. Is it possible for an SMSF without a corporate trustee to make both lump sum and pension payments?. I have heard that super funds should not hold units in related unit trusts. Is this right? 2. What happens if an SMSF breaches the investment rules? 3. Can an SMSF with your deed purchase business real property from its members or their associates? 4. I can t see anything in my SMSF deed allowing me to pay a transition to retirement pension. Can I do this? 5. I acquired an SMSF deed in February 2007 can I pay an account-based pension? 6. Prior to pension phase, does the deed allow for separation of assets between members, and, if so what is the mechanism for this and how should it be documented to comply with the deed? As at July 2007 Australian Business Structures

SMSFs DEEDS OF VARIATION. Can you look at my SMSF deed and tell me if I need to have it amended? 2. Does NTAA Corporate automatically update all deeds previously provided whenever the law changes for free? Or do I have to pay for a deed of variation? 3. I previously ordered an SMSF from you. Since the laws have changed so much, do I now need to upgrade it? 4. Does the deed enable future changes in SIS, etc, to be covered without alteration to the deed? As at July 2007 Australian Business Structures

SUPERANNUATION FUNDS. I note that you provide two different types of superannuation funds. Can you tell us what the differences are between them? Not really! We originally provided superannuation funds solely through DBA Butler Lawyers, and these orders were all processed by DBA Butler s legal team. We still offer this service. We also now have a separate deal with a different law firm, Holding Redlich Lawyers, using their deeds and documents, and we are able to prepare all of the paperwork, etc, for those in-house (the final product is checked by a lawyer). This arrangement has allowed us to offer those deeds at a lower price. Obviously the deeds are different because they're written by different law firms but both comply with the current Super Fund laws, etc. The following Q and A s primarily look at the deeds we provide in-house (although some apply to all funds). 2. Are the deeds updated for the new legislation? Yes. The deeds should be flexible to take into account future changes in the law, but as changes occur (which is often) our lawyers then draft changes to our new deeds as quickly as they can whilst maintaining their high quality. If you would like to upgrade your SMSF deed, you can do so by making an order through our deed of variation service. 3. Why do all of the members have to be trustees? To be a self managed superannuation fund (or SMSF), the fund needs to meet the definition of a SMSF in S.7A of the Superannuation Industry (Supervision) Act 993. One of these requirements is basically that, for all funds except for sole member funds with individual trustees, all of the members must be trustees (or directors of the corporate trustee), and all of the trustees (or directors of the corporate trustee) must be members. However, where a fund has only one member and individual trustees, it is required to have two individual trustees. 4. I heard that if a child is a member, the child does not need to be a trustee. Is this right? Yes, that s true. As usual, there are a few exceptions to the general rule above. In the case of children, S.7A(3)(c) allows the parent or guardian of the child member to be a trustee of the fund in place of the member (even if the parent or guardian is already a trustee). As at July 2007 Australian Business Structures

Unfortunately, in order to maintain our low prices and high services levels, we don t prepare any funds which go outside the general rules set out above. That is, we only set up SMSFs where all of the members are trustees (or directors of the corporate trustee), and all of the trustees (or directors of the corporate trustee) are members (or where a fund has only one member and two individual trustees). 5. What does the Principal do? The Principal is an original party to the establishment of the deed, and also has an on-going role in the fund in case something goes wrong down the track. In simple terms, the Principal is like the settlor, appointor and guardian of a discretionary trust all wrapped up in one (with a very different role, obviously). 6. Can the trustees and members use the accountant s address instead of their residential address? Yes they can, although it s better if they include their own address (including the address assists with identifying the right person, in case there is any ambiguity). Nonetheless, the law doesn t state that the deed/fund needs a residential address for anyone in the fund. 7. Are there any major pros and cons of having a corporate trustee or individuals? In most situations it will be better for an SMSF to have a corporate trustee, rather than individual trustees. The major disadvantage of a corporate trustee is the up-front cost of establishing the company. However, there are longer-term benefits of having a company which generally outweigh the extra costs. The following table looks at the advantages and disadvantages of a corporate trustee over an individual trustee: As at July 2007 Australian Business Structures

CORPORATE TRUSTEE Sole member SMSF You can have a SMSF where one individual is both the sole member and the sole director. Continuous succession A company has an indefinite life span; in other words, it cannot die. Therefore, a corporate trustee can make control of a SMSF more certain in the circumstances of the death or incapacity of a member. Lump sums and pensions An SMSF with a corporate trustee can pay benefits either as pensions or as lump sums. Administrative efficiency When members are admitted to, or cease, membership of the SMSF, all that is required is that the person becomes, or ceases to be, a director of the corporate trustee. The corporate trustee does not change as a result. Therefore, title to all the assets of the SMSF remains in the name of the corporate trustee. Greater asset protection As companies are subject to limited liability, a corporate trustee will provide greater protection where a party sues the trustee for damages. Estate planning flexibility A corporate trustee ensures greater flexibility for estate planning, as the trustee does not change as a result of the death of a member. INDIVIDUAL TRUSTEES Sole member SMSF A sole member SMSF must have two individual trustees. Ceases upon death If the SMSF has individual trustees, eg, a mum and dad SMSF, then timely action must be taken on the death of a member to ensure the trustee/member rules are satisfied. (SMSF rules do not allow a sole individual trustee/member SMSF.) Lump sums only payable on commuting pension The member must surrender their pension entitlement if they wish to obtain a lump sum (as an SMSF must have its primary purpose of paying a pension). You cannot simply pay a lump sum benefit as extra paperwork is needed to evidence the pension entitlement first being requested and then being surrendered. Extra and costly paperwork To introduce a new member to an SMSF with individual trustees requires that person to become a trustee. As trust assets must be held in the names of the trustees, this will require the title to all assets to be transferred to the new trustees when a member is admitted to or exits the fund. Less asset protection If an individual trustee suffers any liability, the trustee s personal assets may be exposed. Extra administration and costs The death of a member requires there to be a change of trustee, and this gives rise to considerable administrative work and costs at an inopportune time. As at July 2007 Australian Business Structures

8. I have received my super fund but the bank won t open a bank account for it. Why? It s probably best to ask the bank about this, but you will also want to make sure that you have fully read the letter that came with the documents and followed the checklist. Also, make sure that you have either completed the ATO form, or applied online, to receive an ABN or TFN for the super fund. You have 60 days after execution to complete the ATO form (although under other regulations the ATO needs notification of the contact details and other basic information in relation to the Fund and the trustee within seven days after the establishment of the Fund, so it s best to complete and send this form within seven days refer regulations.03 and.04 of the Superannuation Industry (Supervision) Regulations 994 (SIS regulations)). Once you have received the ABN and TFN and notified the ATO that it will be a regulated fund, check with the bank to be sure it does not need anything else. 9. I have ordered an SMSF but can t find my SPIN number where can I get this? The Superannuation Product Identification Number (SPIN) was used for surcharge reporting purposes. To apply for one, the fund needs to lodge the following form and pay the relevant fee: Application for an APIR Product Identification Code (PIC) - Investment and Superannuation Products. This form includes SPIN registration details. The form can be obtained from the APIR Web site (www.apir.com.au). However, since the superannuation surcharge has been abolished a SPIN should no longer be necessary (at least for new funds). For further information, refer to http://www.ato.gov.au/super/content.asp?doc=/content/20904.htm 0. Is it possible for an SMSF without a corporate trustee to make both lump sum and pension payments? Yes.. I have heard that super funds should not hold units in related unit trusts. Is this right? The main thing to be careful about is the restrictions on investments that SMSFs can make. In particular there are the "in-house asset rules", which generally prohibit a super fund from investing more than 5% of the fund's assets in a related party. Normally the unit trust will be a related party, and the acquisition of the units will be an investment so you will need to be careful about this (especially if the SMSF already has other in-house asset investments!). For example, if the SMSF has $00,000, the maximum it can generally invest in related parties (in total) is $5000. There are exceptions to this, but it s best to obtain specialist advice (or at least call the Hotline) if you would like an SMSF to invest in a unit trust. As at July 2007 Australian Business Structures

Income from a unit trust may also be special income in the hands of the fund and taxed at penalty rates. The other problem that we recently identified is that SMSFs should only really invest in fixed unit trusts, so that they have a fixed interest in the trust's assets (and the trustee cannot "siphon" funds out of the trust by, for example, issuing units to someone else for less than they are worth). For example: Assume a unit trust starts out with no assets. SMSF buys 00,000 units in a unit trust for $ each. Individual buys 00,000 units in the unit trust for $ in total. The unit trust now has $00,00, and, theoretically, the SMSF has a 50% interest in that (worth $50,000.50), and the individual also has a 50% interest in that (worth $50,000.50). So the individual has effectively just got funds out of the super fund. This can't happen with a fixed unit trust - units must be issued for what they are worth. But, you'll still need to consider in-house asset rules!! For more information see link below http://www.interprac.com.au/corporate/warning_sf_unitholders.pdf Note: If we receive an order setting up a unit trust with an SMSF subscriber, we assume that you have considered all of these issues. 2. What happens if an SMSF breaches the investment rules? This may potentially result in the Australian Taxation Office deeming the fund to be non-complying and this can be disastrous, as a non-complying fund s assets (not income, but assets) are taxed at 45%. 3. Can an SMSF with your deed purchase business real property from its members or their associates? The deed does not specifically state that the trust can purchase business real property from its members or their associates, but that should be fine under the deed. Clause 54 provides that the trustee can invest in "any investment for the time being authorised by the laws of the Commonwealth of Australia or any State or Territory for the investment of trust funds", and " the purchase or acquisition of any real or personal property and the improvement or extension of that property" as well as "any other investments which the Trustee considers appropriate and which are permitted under the Relevant Law". Clause 5.4 provides that "the Trustee and any Director of a Constitutional Corporation which is the Trustee have the power and are authorised to make or vary any of the investments authorised under this Deed notwithstanding that the Trustee or Director may have a direct or indirect interest in the investment or may benefit directly or indirectly from it". Clause 6.2 similarly provides: "All the powers and discretions conferred on the Trustee or any Director by this Deed or by law may be exercised notwithstanding that the Trustee or any Director of a Constitutional Corporation which is the Trustee may: (a) have a direct, indirect or personal interest (whether as a shareholder, director, member or partner of any company, organisation As at July 2007 Australian Business Structures

or partnership) in the manner or result of exercising such power or discretion; or (b) may benefit directly or indirectly as a result of the exercise of any such power or discretion, notwithstanding that the Trustee for the time being is the sole Trustee." Finally, the Relevant Law, being the SIS Act, specifically allows SMSFs to acquire business real property from related parties at market value (refer S.66(2)(b)). 4. I can t see anything in my SMSF deed allowing me to pay a transition to retirement pension. Can I do this? Transition to retirement" pensions (especially before July 2007) are also known as "non-commutable pensions". The conditions for non-commutable allocated pensions can be found in clause 28.9 of our latest deed, and the conditions for noncommutable account-based pensions can be found in clause 32 of our latest deed. Clause 30 also states: If the Relevant Law permits, the Trustee may, at the request of a Member or Beneficiary, pay from the Fund or purchase on behalf of the Member or Beneficiary any type of Pension other than those types of Pension referred to elsewhere in this Deed, which type of Pension is acceptable to the Regulator and is permitted under the Relevant Law, on such terms required under the Relevant Law, or on such terms as are permitted under the Relevant Law and as the Trustee and Member or Beneficiary may agree. More information can be found on transition to retirement pensions at http://www.ato.gov.au/super/content.asp?doc=/content/7429.htm and also at http://www.ato.gov.au/super/content.asp?doc=/content/74202.htm. 5. I acquired an SMSF deed in February 2007 can I pay an account-based pension? Although someone may have bought an SMSF deed before they were fully updated, the deeds are drafted broadly to take into account future changes. In this case, the deeds in February 2007 specifically set out the terms and conditions of certain pensions that can be paid, but clause 27.2(d) of that deed also allows the fund to pay "any other form of pension which is acceptable to the Regulator or is within the requirements of the Relevant Law on such terms as the Trustee may determine". Holding Redlich have provided us with the following general information about the pension clauses of that deed: "Clause 27 provides a facility for such a lump sum benefit to be converted to an income stream benefit on terms agreed between the Pensioner and the Trustee which are within the range of outcomes possible for each type of income stream. The types of income stream benefit payable under the deed include an Allocated Pension/Non-Commutable Allocated Pension (payable under the conditions set out in clause 28) and a Market-Linked Pension/Non-Commutable Market-Linked Pension (payable under the conditions set out in clause 29) and such Defined Benefit and other Pensions as are permitted under the Relevant Law." The new "account-based pensions" (which can be paid by super funds from July 2007) are basically a type of allocated pension, with more generous minimum amounts that can be withdrawn each year (and no maximum). For more information As at July 2007 Australian Business Structures

about these, and the amounts that can be withdrawn, refer http://simplersuper.treasury.gov.au/documents/decision/html/final_decision-02.asp and also http://ato.gov.au/super/content.asp?doc=/content/00096983.htm, and about retirement income streams generally: http://www.fido.gov.au/fido/fido.nsf/byheadline/retirement+income+streams:+fact+sh eets?opendocument The definition and terms of payment of an "account-based pension" can be found in Regulations.03 and.06(9a) of the SIS Regulations 994 - refer http://www.austlii.edu.au/au/legis/cth/consol_reg/sir994582/s.03.html and http://www.austlii.edu.au/au/legis/cth/consol_reg/sir994582/s.06.html. 6. Prior to pension phase, does the deed allow for separation of assets between members, and, if so what is the mechanism for this and how should it be documented to comply with the deed? Our trust deed does allow for the separation of assets between members. Clause 5 sets out the Trustee's Investment Powers. Clause 5.5 is about providing investment choice. It allows the trustee to implement any number of investment strategies. One member can choose to have his/her account invested in accordance with a particular investment strategy that may for example, invest in a certain type of asset. Other members can choose to go with another investment strategy that may invest in quite different assets. To go about separating assets the Trustee needs to prepare the appropriate investment strategies and provide members with information about the respective strategies. Where the Trustee establishes more than one investment strategy under clause 5.5(a) it must: establish a sub-account within the Income Account established under clause 2.4 in respect of each strategy (see clause 5.5(d)); and determine a Fund Earning Rate in respect of each sub-account (see clause 5.5(e)). As at July 2007 Australian Business Structures

SMSFs DEEDS OF VARIATION. Can you look at my SMSF deed and tell me if I need to have it amended? No, we can t we can only take instructions once you have decided to vary your deed. We will then effectively replace your existing deed with our latest deed. We don t review existing deeds to see if changes are necessary for individual clauses. 2. Does NTAA Corporate automatically update all deeds previously provided whenever the law changes for free? Or do I have to pay for a deed of variation? Unfortunately, no deed changes are not automatic, nor free. If you decide you need a new deed, you would need a deed of variation we can provide these for $275 if we provided you with the latest deed for the fund, otherwise it will be $350. 3. I previously ordered an SMSF from you. Since the laws have changed so much, do I now need to upgrade it? While your deed now contains some terminology which has been superseded by the new provisions, it is drawn sufficiently broadly to allow for the relevant changes to be accommodated. However, for funds where members are looking at commencing a new pension, or moving existing allocated pensions into the new account-based pension structure, it may be worthwhile to update the deed. Our revised deed contains provisions include a mechanism for the conversion of allocated pensions into account-based pensions, sets out details concerning the payment of account-based pensions, incorporates the new superannuation terminology, and addresses some specific Simpler Super issues. 4. Does the deed enable future changes in SIS, etc, to be covered without alteration to the deed? The deed contains broad compliance provisions, and is drafted so as to minimise as far as possible the need for updates to be done simply because an aspect of SIS has been amended, or additional strategies have become available under tax and superannuation law. That is - the deed is drafted as broadly as possible, to allow (as much as possible) for future changes in the law. Of course, there will from time to time be regulatory changes which make a deed update either desirable or necessary. For example, if SIS were amended so that the inclusion of a certain provision which is currently contained in the trust deed would render a fund non-complying, it would be necessary to amend the deed. We cannot predict what such changes might involve, and therefore cannot ensure that our deed will continue to be appropriate in all future regulatory environments. However, experience has shown that it weathers most rounds of SIS amendments reasonably well. (This FAQ has been prepared by Riley Jones, an Australian Legal Practitioner, (with some assistance from staff members of NTAA, Interprac and CSA) for Australian Business Structures, and reflects their understanding of the documents prepared for and by NTAA Corporate, and the application of the law to them, as at July 2007) As at July 2007 Australian Business Structures