Draft legislation has been released which would make the electronic signing of SMSF trust deeds legally valid on a permanent basis.
The Corporations Amendment (Virtual Meetings and Electronic Communications) Bill 2020 modernises the Corporations Act 2001 and associated regulations to enable companies to utilise technology to satisfy their legal obligations.
The reforms make permanent the temporary relief granted by the Treasurer via the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 which will end on 21 March 2021. The temporary Determination allows companies to hold meetings virtually, send meeting-related materials electronically and validly execute documents through technology neutral electronic means.
There has been some uncertainty whether the temporary Determination enables the electronic signing of SMSF trust deeds electronically. This is specifically addressed in the Explanatory Memorandum:
The temporary measures do not expressly state that the relief applies to execution of deeds by companies, creating some uncertainty. The permanent reforms will make clear that companies will be able to create and sign deeds electronically.
The Electronic Transactions Act 1999 (ETA 1999), which facilitates the use of electronic transactions and electronic signatures, does not apply to the Corporations Act 2001 or instruments such as an SMSF trust deed executed by a company trustee made under that Act. As a result, company documents must be executed by all parties physically signing the same static document.
According to the Explanatory Memorandum, companies have embraced the efficiencies provided under the temporary Determination by using electronic means to execute documents and hold virtual meetings, resulting in regulatory savings and increased productivity. The aim of the amendments is to permanently modernise the relevant provisions in the Corporate Act.
The key change directly impacting SMSF professionals will be a legislated ability for the valid electronic signing of SMSF trust deeds. Although common law doesn’t dismiss the valid execution of a deed based on an electronic signing method, precedents are few and far between. For many years we’ve had a catch-22 situation where there has been a lack of case law supporting the electronic signing of SMSF trust deeds, so professionals have erred on the side of caution, which then leads to fewer cases of deed execution being tested before the Courts. This is understandable. No one wants their client having a judgment go against them due to ineffective electronic signing of a deed.
Electronic signing aligned to the ETA
In drafting these changes the Amendment has borrowed from the electronic signing provisions of the Commonwealth Electronic Transactions Act 1999 (ETA 1999). Specifically, a document is taken to be signed by a person if:
- the person indicates, by means of an electronic communication, that the person has signed the document; and
- a method is used to identify the person and to indicate the person’s intention in respect of the information communicated in the document; and
- the method used was either:
- as reliable as appropriate for the purpose for which the document was generated or communicated, in light of all the circumstances, including any relevant agreement; or
- proven in fact to have fulfilled the functions described above, by itself or together with further evidence.
In addition, where more than one electronic signature is required, different copies or counterparts of the document can be signed, provided each copy is identical and contains the entire contents of the original document. This removes the need for all signers to sign the same single, static document.
Positively, the proposed amendment is intentionally technology neutral. The key aspects are:
- Identification of the signer; and
- Intent to sign and be bound by what they’re signing
Historically the execution of trust deeds has involved a significant amount of formality. This is not necessarily a bad thing. Formalising the legal relationships involved in creation of a trust or SMSF is a significant event that should have long term positive implications for the parties involved. A certain level of ceremony or celebration should be involved, but not to the current degree where it inhibits people from taking positive action to secure their financial future and perpetuates the myth that SMSFs are overly cumbersome and an administrative burden.
Benefits of electronic signing of SMSF trust deeds
According to the explanatory memorandum enabling the electronic signing of deeds would have regulatory savings of $10 million per year. This obviously doesn’t just include SMSF trust deeds electronically signed by a company trustee or other express trusts (family trusts etc), but a wide range of legal documents created as deeds such as indemnity deeds, deeds of termination, confidential deeds, escrow deeds and deed polls.
In addition to the cost savings of electronic signing of SMSF trust deeds, other benefits include:
- Environmental: Fewer emissions from clients physically visiting their advisers / lawyers to sign deeds and less physical resources used via a paperless process;
- Efficiency: The formal SMSF establishment process timing can be slashed from days to minutes;
- Enables innovation: Legislating electronic signing of deeds will increase innovation in the space and potentially make SMSFs more accessible for suitable trustees;
- Security: Existing electronic signing technologies have incredibly strong security features which help ensure electronically signed deeds and as reliable, if not more reliable than their paper counterparts;
- Reliability: No more lost trust deeds as well as better tracking of amendments and changes of trustees through an unbroken chain of electronically signed deeds.
You could even go so far to say that electronically signed SMSF trust deeds are vegan friendly as no one has had to kill and skin an animal to make vellum!
Electronic signing best practice tips
Although both the temporary Determination as well as the draft changes to the Corporations Act are technology neutral its important SMSF professionals ensure they utilise appropriate procedures and technology to facilitate the electronic signing of SMSF trust deeds.
Specifically, the following recommendations would ensure compliance and provide a solid defence if the validity of the electronic signing was ever called into question:
- Identification: Identify your clients who will be parties to the deed (i.e. the directors of the company trustee and members of the SMSF). This might seem obvious – you know who your clients are right? Best practice is to ensure you’ve adequately identified your clients and recorded proof of their identification. Financial advisers already do this and it’s best practice for accountants also.
- Confirm Intent: A key part of the existing electronic signing provisions of the ETA these changes are modeled on is about ensuring the person signing actually intends to sign and knows what they’re signing. Intent should be easy if an appropriate signing technology is used, but we still have a professional obligation to ensure people understand the consequences of signing an SMSF trust deed electronically and that they will be bound by that deed.
- Correct Technology: As a bare minimum a robust electronic signature application should be used. There are many in the market, with DocuSign, AdobeSign and Australian based PleaseSign being popular options. Each signatory needs to have their own email address – no joint email accounts! You need to have confidence that the account is only used by the signatory (who you’ve appropriately identified) and no other parties have access at the time of execution. Multi-factor authentication is essential. A signing password delivered to the mobile phone of the signatory provides additional certainty in regard to identification and intent. Even with correct technology and appropriate procedures as professionals we need to be aware that there is a potential for fraud so need to do everything within our power to ensure valid electronic execution.
Practical hurdles with electronically signed SMSF trust deeds
Although these proposed changes are a fantastic leap forward for not just SMSFs but also efficient business in general, there are some real-world practicalities that need to be worked through.
As we’ve seen through the COVID-19 pandemic, State Governments are a law unto themselves and although in most cases the States have also made changes to better enable remote and electronic signing and witnessing their measures are also temporary. In addition, many State based Revenue Offices only allow paper deeds or copies of wet-ink signed trust deeds to be submitted to them which could cause impediments for SMSFs looking to enter into property transactions.
Banks and other institutions also need to update their internal procedures to accept electronically signed SMSF trust deeds. To their credit many banks as well as investment platforms have already seen the benefits (i.e. cost savings) of using electronic signature solutions within their businesses, however this is still a work in progress which will take some time to be completely integrated.
The SMSF documents themselves, including the constitution of the trustee companies as well as the SMSF trust deeds also need to specifically accommodate provision enabling electronic execution. Some document providers have already done work in this area.
Timing of when the draft legislation becomes effective is also something to watch. Hopefully it will become law from at or before the temporary determination expires on 21 March 2021.
It’s also important to understand the proposed amendments are to the Corporations Act, therefore do not impact the electronic signing of SMSF trust deeds where the trustees are individual trustees. I don’t believe we need another reason to only use special purpose companies as the preferred trustee structure for self managed super funds, however the ability to sign electronically is yet another benefit!
This proposed law change is well overdue. We’ve seen how individuals and businesses have embraced technology and new approaches to doing business during COVID-19. Being adaptable is essential for survival and the SMSF space is no different.
The electronic signing of SMSF trust deeds is one small, but significant step towards what I call SMSF2.0.
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