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Change of SMSF trustee: practical tips for limited recourse borrowing arrangements

If there is a change of trustee of an SMSF, then the arrangements for the handover must take into account any limited recourse borrowing arrangement which is in place (LRBA).

The outgoing and incoming trustees must be mindful of their obligations under superannuation law and the LRBA documents including the custody deed, the loan agreement or mortgage/equitable charge. This article provides some tips and guidance to trustees to help them comply with their duties.

Why would I change the trustee of my fund?

There are a number of reasons why a fund may change its trustee including:

  • minimising the risk of incurring higher administrative penalties under the new SMSF trustee penalty regime, which took effect on 1 July 2014
  • request by a financier
  • retirement of an individual trustee
  • death of an individual trustee/member
  • a member leaving the fund
  • forthcoming deregistration of the corporate trustee
  • change of circumstances, such as divorce.

Changing the trustee of your fund? Then…

 …check with your financier

It is particularly important where an arm’s length financier has loaned money to the SMSF that any arrangements for the change of trustee are first discussed with the lender. This is a requirement of the financing documents. If they agree, then they will have specific requirements. Sometimes they won’t agree, as the lender will have been careful to specify their preferred SMSF trust structure before loaning any moneys.

The same goes for related lenders – particularly where related parties may not be members of the SMSF (and are therefore less likely to be aware of the change of trustee unless they are informed).

…review your LRBA documents

Following on from the above point, before a fund changes its trustee, review the terms of the LRBA’s custody, loan and security documents, to see if they contemplate a change of the fund’s trustee. In each case, the outgoing trustee(s) must provide advance notice to the lender and custodian – their consent to any change is required, and may result in new finance documentation being signed. This will be an expense of the fund.

You should ensure that the change of trustee does not trigger any default provisions under the relevant loan agreement and security documents. Normally these loan and security documents will have been provided by the lender and will most likely determine a change of trustee – without the lender’s prior consent – to be a default.

The Custody Deed, Loan Agreement and Equitable Charge documents may contain interpretation provisions to the effect that a reference to any legal person in the document includes the legal personal representatives, successors and assigns of that person. As a result:

  • it may be the case that no specific amendments would be required to those documents in light of a change of trustee – however most of the time institutional lenders will require documents to be prepared
  • whilst the documents do not prevent a change of trustee, the change of trustee documents will not of themselves discharge the outgoing trustee from its obligations under the Loan Agreement. As a result, the outgoing trustee should seek to perfect the change of trustee by having the new trustee expressly assume all legal obligations under the finance documents and procure a formal release of the outgoing trustee’s obligations.

Practical tips to document the changes to the LRBA

To perfect the necessary changes to the LRBA arrangements, which would otherwise only take effect in equity, it is advisable and good practice to arrange for the custodian, lender, outgoing trustee and incoming trustee to sign a short deed to complement the resignation and appointment. That deed should confirm:

  • that the outgoing trustee transfers its rights to the incoming trustee, and is discharged of its obligations, under the LRBA documents
  • that the incoming trustee agrees to assume all of the outgoing trustee’s obligations under those documents
  • that if the acquirable asset is real property/land, then, where required, the trustee will notify the relevant state or territory land titles office of the change to the debtor’s details (being the trustee(s)) for the registered mortgage.

The registered proprietor (or in the case of shares, the shareholder) of the acquirable asset will be the custodian, not the trustee, so no change will be required to the title of the asset.

In Victoria, the new Land Victoria Mortgage form no longer requires the debtor’s details to be included. As a result, if the new Land Victoria form was used to register the mortgage, Land Victoria will not need to be notified of the change of trustee/debtor because only the custodian is recorded as the mortgagor. If the mortgage was registered in any other state or territory, you should seek independent advice on this issue.

The deed should be prepared in addition to the change of trustee document which is executed to record the change of trustee in accordance with the requirements of the fund’s deed.

Change of trustee structures

A change of trustee involves one of the following structural changes to the fund:

  • individual trustees to a corporate trustee
  • corporate trustee to individual trustees
  • individual trustees to different individual trustees
  • corporate trustee to a different corporate trustee.

Regarding the appointment of individual trustees, superannuation law permits the following trustee appointments in place of a member:

  • a legal personal representative of a deceased member
  • a legal personal representative of a member with disabilities who holds an enduring power of attorney
  • a parent, guardian or legal personal representative of a minor member.

Where there is a change of trustee, it is important that the outgoing and incoming trustees do everything required to vest the fund and its assets in the name of the new trustee(s). This includes delivering all books and records to the new trustee(s) and changing the signatories to fund bank accounts etc.

How do I change the trustee of my fund?

It is important to always follow the change of trustee process set out in the governing rules of the fund. The governing rules are contained in the fund’s trust deed.

Generally, an SMSF deed would typically provide guidance on:

  • appointing individual trustees: a corporate trustee may appoint the members of the fund as trustees in place of the trustee by executing a deed to that effect. Also, individual trustees must make appointments as necessary to ensure, generally speaking, that all members are trustees
  • appointing a corporate trustee: individual trustees, or a corporate trustee, may appoint a corporation of which the members of the fund are the only directors, as a replacement trustee. If the trustees of the fund were previously individuals, the trustee must immediately after the appointment of the corporate trustee replace the fund’s deed with another deed which provides the mechanisms to enable a corporation to act as trustee
  • formalities: formalities will include:
    • ensuring the appointment or removal of a trustee is in writing and immediately advised to any other trustee
    • ensuring the fund has the appropriate deed for the incoming trustee(s), depending on whether the fund has a corporate trustee or individual trustees.

Do I need to notify anyone about the change of trustee?

If there is a change to the fund’s trustee or directors of the corporate trustee, then you must notify the ATO of this change within 28 days of that change by submitting a Change of details for superannuation entities (NAT 3036) form.

 

If there is a change of trustee of an SMSF, then the arrangements for the handover must take into account any limited recourse borrowing arrangement which is in place (LRBA).

The outgoing and incoming trustees must be mindful of their obligations under superannuation law and the LRBA documents including the custody deed, the loan agreement or mortgage/equitable charge. This article provides some tips and guidance to trustees to help them comply with their duties.

Why would I change the trustee of my fund?

There are a number of reasons why a fund may change its trustee including:

  • minimising the risk of incurring higher administrative penalties under the new SMSF trustee penalty regime, which took effect on 1 July 2014
  • request by a financier
  • retirement of an individual trustee
  • death of an individual trustee/member
  • a member leaving the fund
  • forthcoming deregistration of the corporate trustee
  • change of circumstances, such as divorce.

Changing the trustee of your fund? Then…

 …check with your financier

It is particularly important where an arm’s length financier has loaned money to the SMSF that any arrangements for the change of trustee are first discussed with the lender. This is a requirement of the financing documents. If they agree, then they will have specific requirements. Sometimes they won’t agree, as the lender will have been careful to specify their preferred SMSF trust structure before loaning any moneys.

The same goes for related lenders – particularly where related parties may not be members of the SMSF (and are therefore less likely to be aware of the change of trustee unless they are informed).

…review your LRBA documents

Following on from the above point, before a fund changes its trustee, review the terms of the LRBA’s custody, loan and security documents, to see if they contemplate a change of the fund’s trustee. In each case, the outgoing trustee(s) must provide advance notice to the lender and custodian – their consent to any change is required, and may result in new finance documentation being signed. This will be an expense of the fund.

You should ensure that the change of trustee does not trigger any default provisions under the relevant loan agreement and security documents. Normally these loan and security documents will have been provided by the lender and will most likely determine a change of trustee – without the lender’s prior consent – to be a default.

The Custody Deed, Loan Agreement and Equitable Charge documents may contain interpretation provisions to the effect that a reference to any legal person in the document includes the legal personal representatives, successors and assigns of that person. As a result:

  • it may be the case that no specific amendments would be required to those documents in light of a change of trustee – however most of the time institutional lenders will require documents to be prepared
  • whilst the documents do not prevent a change of trustee, the change of trustee documents will not of themselves discharge the outgoing trustee from its obligations under the Loan Agreement. As a result, the outgoing trustee should seek to perfect the change of trustee by having the new trustee expressly assume all legal obligations under the finance documents and procure a formal release of the outgoing trustee’s obligations.

Practical tips to document the changes to the LRBA

To perfect the necessary changes to the LRBA arrangements, which would otherwise only take effect in equity, it is advisable and good practice to arrange for the custodian, lender, outgoing trustee and incoming trustee to sign a short deed to complement the resignation and appointment. That deed should confirm:

  • that the outgoing trustee transfers its rights to the incoming trustee, and is discharged of its obligations, under the LRBA documents
  • that the incoming trustee agrees to assume all of the outgoing trustee’s obligations under those documents
  • that if the acquirable asset is real property/land, then, where required, the trustee will notify the relevant state or territory land titles office of the change to the debtor’s details (being the trustee(s)) for the registered mortgage.

The registered proprietor (or in the case of shares, the shareholder) of the acquirable asset will be the custodian, not the trustee, so no change will be required to the title of the asset.

In Victoria, the new Land Victoria Mortgage form no longer requires the debtor’s details to be included. As a result, if the new Land Victoria form was used to register the mortgage, Land Victoria will not need to be notified of the change of trustee/debtor because only the custodian is recorded as the mortgagor. If the mortgage was registered in any other state or territory, you should seek independent advice on this issue.

The deed should be prepared in addition to the change of trustee document which is executed to record the change of trustee in accordance with the requirements of the fund’s deed.

Change of trustee structures

A change of trustee involves one of the following structural changes to the fund:

  • individual trustees to a corporate trustee
  • corporate trustee to individual trustees
  • individual trustees to different individual trustees
  • corporate trustee to a different corporate trustee.

Regarding the appointment of individual trustees, superannuation law permits the following trustee appointments in place of a member:

  • a legal personal representative of a deceased member
  • a legal personal representative of a member with disabilities who holds an enduring power of attorney
  • a parent, guardian or legal personal representative of a minor member.

Where there is a change of trustee, it is important that the outgoing and incoming trustees do everything required to vest the fund and its assets in the name of the new trustee(s). This includes delivering all books and records to the new trustee(s) and changing the signatories to fund bank accounts etc.

How do I change the trustee of my fund?

It is important to always follow the change of trustee process set out in the governing rules of the fund. The governing rules are contained in the fund’s trust deed.

Generally, an SMSF deed would typically provide guidance on:

  • appointing individual trustees: a corporate trustee may appoint the members of the fund as trustees in place of the trustee by executing a deed to that effect. Also, individual trustees must make appointments as necessary to ensure, generally speaking, that all members are trustees
  • appointing a corporate trustee: individual trustees, or a corporate trustee, may appoint a corporation of which the members of the fund are the only directors, as a replacement trustee. If the trustees of the fund were previously individuals, the trustee must immediately after the appointment of the corporate trustee replace the fund’s deed with another deed which provides the mechanisms to enable a corporation to act as trustee
  • formalities: formalities will include:
    • ensuring the appointment or removal of a trustee is in writing and immediately advised to any other trustee
    • ensuring the fund has the appropriate deed for the incoming trustee(s), depending on whether the fund has a corporate trustee or individual trustees.

Do I need to notify anyone about the change of trustee?

If there is a change to the fund’s trustee or directors of the corporate trustee, then you must notify the ATO of this change within 28 days of that change by submitting a Change of details for superannuation entities (NAT 3036) form.