The Unfortunate Truth About ‘Catch-all’ Provisions in SMSF Deeds

Q.   What are “catch-all provisions” and “general compliance clauses”?  
Both catch-all and compliance clauses commonly appear in SMSF deeds.  Although the terms are often used interchangeably, there is a difference between catch-all provisions and general compliance clauses.

A general compliance clause is intended to automatically incorporate super legislation changes into the trust deed.  An example of a general compliance clause is:

 “Where compliance with a SIS requirement is a pre-requisite for the fund as a self managed superannuation to qualify as a complying fund and that requirement has not been set out in this Deed then the SIS requirement will deemed to have been included in this Deed”.

A catch-all provision is intended to give trustees the power to do anything which is not prohibited by law.  An example of a catch-all provision is:

“In addition to any powers expressly conferred upon the Trustee by the SIS Act or by the provisions of this Deed, the Trustee has the power to do anything which is not prohibited by SIS Act”.


Q.    What do these provisions seek to achieve?
Broadly, catch-all provisions and general compliance clauses are intended to ensure the terms of the trust deed are always up to date and SIS Act compliant, thereby eliminating costs of subsequent deed amendments.  The question is: Do they work?


Q.    What is the history of these provisions?
Possibly, the history of general compliance provisions starts with Regulation 18 of the Occupational Superannuation Standards Regulations.  This regulation required the trust deed of a superannuation fund to include clauses which reproduced certain provisions of the Occupational Superannuation Standards Act  (OSSA).  OSSA was the predecessor to the SIS Act .  

For example, OSSA Regulation 16 was required to be set out in the trust deed of the fund.  This regulation set out the OSSA standards on the prohibition on funds lending to members, funds borrowing or investing on non-arms’ length terms.

With the introduction of the OSSA regulatory system, most super fund deeds were amended to expressly include the various provisions which were required to be included in the trust deed by OSSA Regulation 18.

Given the frequent changes to superannuation law, many lawyers thought that there would be new OSSA standards introduced and so attempted to deal with new standards by including a provision to the effect that any future OSSA standard which was required by Regulation 18 to be set out in the trust deed of the fund was to be deemed automatically incorporated into the trust deed. This “OSSA Standards” provision was the first “compliance provision”.

Gradually, the drafting of the OSSA Standard provision became more sophisticated and attempted to deal with not only new OSSA standards which were required to be introduced into the deed but also future modifications of existing OSSA standards and the introduction in the future of new exceptions to the current standards.

At the same time, catch-all provisions became a popular provision of superannuation deeds as a means of conferring power on trustees to deal with any new developments in legislation and practice. 


Q.    Compliance clauses were useful under the OSSA regime.  Do they remain useful under the SIS regime?
The OSSA and SIS Regimes for superannuation funds are very different.  

The federal government does not have power under the Australian Constitution to make laws with respect to superannuation.   In order to make laws which regulate superannuation, the federal government has to rely on one of its own powers.

Under the OSSA regime, the federal government indirectly regulated superannuation by using its tax powers (that is by conferral of tax incentives and the imposition of tax penalties).  It could not expressly require members and trustees to do or not do anything.  But it could indirectly require trustees and members to put those requirements and prohibitions in the deed in order to receive favourable tax treatment.  Hence, the need for and existence of OSSA Regulation 18.

By contrast the SIS Regime relies on the federal government’s corporations and old age pension powers as well as its taxation powers.  The reliance on the corporations and old age pension powers allows the federal government to directly require members and trustees to do or not do anything.  

Under the SIS Regime it is hard to find a section which requires a particular provision to be included in the trust deed.  While section 52 (statutory covenants) would appear to be a contender, this provision is really a deeming provision which deems the various statutory covenants to be included in the governing rules if they are not already included.  

As SIS provisions apply by force of law rather than as a provision of the trust deed (the statutory covenants are deemed to be included in the trust deed and therefore are not an exception) the SIS Act does not contain and does not need to contain a provision which corresponds to OSSA Regulation 18.    

General compliance provisions are essentially a drafting response to an issue which does not arise in the SIS Regime but which arose in the preceding OSSA Regime.  They are unnecessary.

There is a limited role for such a provision in super trust deeds.  But it should be restricted to the situation were the trust deed sets out a particular prudential standard and that prudential standard is subsequently relaxed.  An example would be where the trust deed embeds the 5% in house asset limit and that limit is subsequently relaxed from 5% to 10%.  In this situation an appropriately drafted compliance clause could “capture” the modified standard without the need for an amendment.


Q.    What are the consequences of a deed containing a general compliance clause?
While the role of these clauses is limited (see above paragraph), it will generally not matter if these clauses appear in a deed provided they are appropriately drafted.  There is the danger that a too-widely drafted clause may catch too much.  

This aspect of compliance clauses was illustrated in the Queensland case of Donovan v Donovan  when an SMSF trust deed sought to allow for binding death benefit nominations by simply incorporating the “relevant SIS requirements”.  The Supreme Court noted that even if the nomination was binding (in fact the nomination was not binding as it failed to use the term “binding” or any equivalent terminology), the compliance provision incorporated the SIS rules as they related to binding nominations for non-SMSF funds.  The result was that the nomination had to be refreshed every three years and had not been so.


Q.    Do catch-all provisions enable an SMSF deed to remain up to date without the need for further amendment?
True it is that there are changes to the law that a suitable catch-all provision or the appropriate use of catch-all language might catch.

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 person eligible to receive a member’s death benefit increased - provided the trust deed allowed payments.

If after July 2008, a trustee wanted to pay a death benefit to a person who met the expanded definition of (say) spouse and the trust deed was a pre July 2008 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.

However, if the deed merely replicated the pre-July 2008 definition of spouse or member and did not have any catch-all language in the definition, the trustee would not be able to make the payment without the deed being updated.

However it is paramount that trustees and fund administrators understand both the practical and technical limitation of catch-all language and catch-all provisions.


Q.    What are the practical limitations of catch-all provisions?
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 is 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 limited recourse borrowing arrangement.  Instead, the lender will require the trust deed to include an express power of the trustee to borrow.


Q.    What are the technical limitations of catch-all provisions?
Are catch-all provisions effective at all?  

A trust is not a legal entity, it is a relationship – it is the trustee that is the legal entity.  The powers of a trustee do not 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, legislation and the trust deed.  If the trustee undertakes an action which is not permitted by one of those sources of power, the trustee is in breach of trust.

Let’s look at those sources of power.  

Clearly, it is impractical for a court to continually confer powers on trustees.  

Also, while the relevant state trustee legislation certainly confers powers on trustees, certain superannuation powers are not within their scope.  The SIS Act does not give trustees extensive powers. SIS Act provisions are generally either prohibitive (they say a trustee cannot do something; for example, “The Trustee must not lend to a member”) or, they are permissive (they allow a certain action but do not actually authorise a trustee to take that action).

It is the terms of the trust deed that are the predominant source of a trustee’s power.   This is where the argument as to the effectiveness of catch-all provisions arises.

The trustee’s powers must be set out expressly and should not be implied from a catch-all provision.  There is no standard set of trustee’s powers, a positive formulation of the trustee’s powers must be set out expressly in the deed.

Catch-all provisions are not sufficient because they do not constitute a positive formulation of the trustee’s powers – powers which need to be clear and concise.


Q.    Even if we accept the argument that catch-all provisions do give trustees power to undertake particular actions – is that enough?
Even if we accept an appropriately drafted catch-all provision effectively gives the trustee power to undertake a particular action, catch-all provisions do not set out the mechanics or parameters of using the relevant power they purport to give. Those mechanics and parameters are crucial in the proper administration of the fund.

In certain situations, this is extremely important.  This can be seen in the context of binding nominations.

The SIS laws are not a source of power for a member to make a binding death benefit nomination - nor are they a source of power for a trustee to accept the nomination.  

The SIS Act simply states that if the trust deed allows a third party (ie a member) to give directions to the trustee, the trustee will not be in breach of its duty not to delegate its decision-making power.

So, the power has to come from within the deed.  Let’s accept the argument a catch-all provision gives the trustee power to accept a binding nomination .    That is all the catch provision will do – give power to the trustee to accept the binding nomination. It does not compel the trustee to act in accordance with the nomination.  The trustee could follow the nomination if it wanted to, but would not have to under the deed.

Another example is account-based pensions.  The SIS laws say that if a benefit is cashed out it can be paid as either a pension or lump sum.  In short, pensions are not compulsory under the super laws.  This means that the terms of a pension and its ability to provide for any estate planning objectives depends entirely on the terms of the trust deed.

You cannot get around this by simply saying a fund can provide whatever benefits are permitted by the SIS laws.  The SIS Act provides that the trustee can pay an account-based pension but the definition of an account based pension is not complete.   For example, the SIS regs provide that a pension is only transferable on the death of the pensioner.  This is not the authority that a particular pension is reversionary or non-reversionary.  Whether the pension is reversionary, and the identity of the reversionary beneficiary, is determined by the terms of the pension.  The powers to design that pension must come from the deed.


Q.    What should a trustee do if it has relied on an ineffective catch-all provision?
That depends on the particular action the trustee has taken.

If a member has given a “binding nomination” to the trustee on the basis of a catch-all provision, then the deed should be amended to expressly provide for binding nominations.  The member should then make another nomination in accordance with the terms of the amended deed.  

For other actions - perhaps the trust deed can be amended retrospectively and signed by the members to ratify the trust action.  It would really depend on the action the trustee has taken and even then, on a case by case basis.


Q.    What do you do if your deed relies on catch-all provisions?
Amend it.  Join a service like SuperCentral that amends deeds frequently for a small annual sum, and without the trustee having to sign documents.

By adopting a set of clear, concise and certain provisions in a well-drafted superannuation trust deed the trustee no longer has to put their faith in the dubious effectiveness of catch-all provisions but rather can rely on inexpensive and frequent updates that ensure the deed contains all the necessary powers and protections demanded by the complex legal and regulatory superannuation regime.  


Q.    Do frequent deed updates for SMSFs give rise to any CGT liability?
The High Court has held that changing a super fund’s trust deed does not lead to a resettlement of the trust and hence CGT will not apply .

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