30/11/2018

Trust deeds with principal employer roles are still widely in existence. If your SMSF deed names a principal employer or other roles such as a founder, you should take extra caution when administering the fund. Jeff Song explains.

John and Mary are members and individual trustees of their SMSF, which was set up with their private company, JM Pty Ltd, acting as the principal employer. The principal employer must consent to any future amendment of the trust deed and/or change of trustee. John and Mary have recently retired and sold their business and are no longer the directors or shareholders of JM Pty Ltd.

In light of commencing their pensions and also as a part of updating their succession plans, they wish to update their trust deed and appoint a company as trustee in their place. They do not wish to involve JM Pty Ltd in doing so, believing that it would unnecessarily cause difficulty and delay in getting the new directors to sign all relevant paperwork. How do they handle this ‘principal employer’ role in their fund?

The age when the superannuation funds were commonly connected to employment and provided by the employer of the members has passed, but as a result of using outdated trust deeds, the superfluous legacy of having a principal employer still remains with SMSFs.

In light of the modern superannuation laws, it is not a requirement or recommended to have a principal employer role with powers over management of SMSFs. With SMSFs, employers should merely make contributions to the funds at the direction of the members (subject to relevant superannuation laws) and it is no longer in the member’s interest to have employer control over how benefits are being paid or otherwise managed in the fund, as the term “self-managed” rightly suggests.  

Although the concept of principal employer has become obsolete over time, and John and Mary are no longer related to the company, the principal employer cannot be ignored when administering the fund.

Roles and powers given to the principal employer by the trust deed (i.e. requirement to seek its consent to any variation of trust deed and change of trustee) can be exercised, varied and/or extinguished in accordance with the trust deed but these powers do not automatically extinguish by the passing of time or by the fact that the members are no longer related to the principal employer.

Ignoring the principal employer could mean the amendment of the trust deed and/or the change of trustee are invalid and expose the trustees’ decisions to challenges by third parties.

If you are considering selling, deregistering or ceasing employment with, the principal employer of your SMSF, you should seek appropriate legal advice. Even if you are not thinking about doing any of these in the near future, you should still update your trust deed for prudence sake and get rid of the principal employer role.

The mere fact that that there is a principal employer for the SMSF has at the least the unnecessary consequence of having less flexibility in administering the fund.

For help to remove the principal employer role in your SMSF call Jeff Song at Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.