Even though the terms are often used interchangeably, and both commonly appear in SMSF deeds, there is a difference between a catch-all provision and a general compliance clause, says Tony Negline

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 prerequisite for the
fund as a self-managed superannuation fund to qualify as a complying fund, and that requirement has not been set out in this Deed, then the SIS requirement will be 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 the SIS Act.”

These clauses are a reasonably controversial part of the superannuation arena. Some argue that a decent catch-all clause and compliance clause delays the need to update self-managed super fund trust deeds.

To fully investigate the differences between catch-all and general compliance clauses, as well as some important historical background, I interviewed Shannon Lee, a lawyer with Townsends Business and Corporate Lawyers.

NEGLINE: What do these provisions seek to achieve?

LEE: Broadly, catch-all provisions and general compliance clauses are intended to ensure the terms of the trust deed are always up to date and compliant with super law, thereby eliminating costs of subsequent deed amendments.

NEGLINE : What is the history of general compliance clauses?

LEE : Possibly, the history of general compliance provisions starts with the Occupational Superannuation Standards Regulations, which ceased to exist in 1994. These regulations required the trust deed of a superannuation fund to include clauses that reproduced certain provisions of the Occupational Superannuation Standards Act (OSSA). OSSA was the predecessor to the SIS Act. For example, OSSA Regulation 16 had to be set out in a super fund’s trust deed. This regulation set as OSSA standards the prohibition on funds lending to members, and on funds borrowing or
investing on non-arm’s length terms. With the introduction of the OSSA regulatory system for super, most trust deeds were amended to expressly include the various provisions which were then required to
be included in the trust deed by OSSA Regulation 18. Given the frequent changes to superannuation law, lawyers attempted to deal with new standards by including a provision to the effect that any future OSSA standard that was
required by Regulation 18 to be set out in the trust deed of the fund was deemed to be automatically incorporated into the trust deed. This “OSSA Standards” provision was the first “compliance clause”. Gradually, the drafting of the OSSA Standard provision became more sophisticated and attempted to deal with not only new OSSA standards which had to be included in a trust deed but also future modifications of existing OSSA standards and future new standards. At the same time, catch-all provisions became a popular means of conferring power on trustees to deal with any new developments in legislation and practice.

NE GLINE : Compliance clauses were useful under the OSSA regime. Do they
remain useful under the SIS regime?

LEE : The OSSA and SIS regimes for superannuation funds are very different. The Federal Government does not have specific power under the Australian Constitution to make laws with respect to superannuation or to regulate any trustees. In order to make laws, 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 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.

NEGLINE : What about Section 52 – the covenant clause?

LEE : This deems the various statutory covenants to be included in the governing rules if they are not already included and therefore technically isn’t a contender. The SIS provisions apply by force of law rather than as provisions 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 that corresponds to OSSA Regulation 18.

NEGLINE : Is there any role for general compliance clauses under SIS?

LEE : Yes, but it’s a limited role. Its use would be restricted to the situation were the trust deed sets out a particular prudential standard and that prudential standard was subsequently relaxed. For example, where the trust deed embeds the 5 per cent in-house asset limit and that
limit was subsequently relaxed from 5 per cent to 10 per cent. In this situation an appropriately drafted compliance clause could “capture” the modified standard without the need for an amendment to a super fund’s trust deed.

NEGLINE : What are the consequences of a deed containing a general compliance clause?

LEE : While the role of these
clauses is limited, it will generally not matter if these clauses appear in a trust deed provided they are appropriately
drafted. Some compliance clauses are drafted very widely and catch too much. For example, in the Queensland Supreme Court case decided last year, Donovan v Donovan, an SMSF trust deed sought to allow for binding death benefit nominations by simply incorporating the “relevant SIS requirements” via a general compliance clause. The Supreme Court noted that even if the nomination were 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 relate to binding nominations within non-SMSF funds.

NEGLINE : Let’s now look at catch-all provisions. Do they enable an SMSF deed to remain up to date without the need for further amendment?

LEE : There are changes to the law that a suitable catch-all provision, or the appropriate use of catch-all language, will trap. For example, from July 1, 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 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. 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.

NEGLINE : What are the practical limitations of catch-all provisions?

LEE : 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 super gearing arrangement. Instead, the lender will require the trust deed to include an express power of the trustee to borrow.

NEGLINE : What are the technical limitations of catch-all provisions?

LEE : Firstly, there is argument as to whether catch-all provisions are at all effective. A trust is not a legal entity – 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 the courts, by legislation, and by 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 and territory trustee legislation certainly confers powers on a trustee, certain superannuation powers are not within their scope. The SIS Act does not give trustees extensive powers. These provisions are generally either prohibitive, or they are permissive.

NEGLINE : What do you mean by permissive and prohibitive powers?

LEE : Well, prohibitive powers tell a trustee that they cannot do
something. For example, “The trustee must not lend to a member”. A permissive power allows a certain action but does not actually authorise a trustee to take that action.

NEGLINE : So what is a trustee’s dominant source of power?

LEE : It’s 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. On  the one hand, it is argued that the powers must be set out expressly and should not be implied from a catch-all provision. The basis of this argument is that as 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. On the other hand, it is argued that a catch-all provision is sufficient – it is a positive formulation of the trustee’s powers and that power does not need to be express.

NEGLINE : What if we accept the argument that catch-all provisions do give trustees power to undertake particular actions?

LEE : Even if we accept that an appropriately drafted catch-all provision effectively gives the trustee power to undertake a particular action, they do not set out the mechanics or parameters of using that power. 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. Also, they’re not 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 (so, a member) to give directions to the trustee, the trustee will not be in breach of its duty not to delegate its decisionmaking power. So, the power has to come from within the deed. Let’s accept the argument that a catch-all provision gives the trustee
power to accept a binding nomination. That is all the catch-all 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 depend 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 beneficiary, are determined by the terms of the pension.

NEGLINE : What should a trustee do if it has relied on an ineffective catch-all provision?

LEE : 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.

NEGLINE : Do frequent deed updates for SMSFs give rise to any CGT liability?

LEE : The High Court decided a while ago that changing a super fund’s trust deed did not lead to a resettlement of the trust and hence capital gains tax (CGT) will not apply.

Tony Negline is general manager, corporate strategy, at SUPERCentral – www.supercentral.com.au. He is also the author of “A How to Book of Self Managed Superannuation Funds”. Details about the book are available at www.atcbiz.com.au/smsfstore.php

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