A recent NSW Supreme Court case highlights the importance of appropriate trustee combinations as well as strategic mechanisms that assist when trustees don't agree. David Oon and Nathan Papson explain.
Having the right combination of self-managed superannuation fund (SMSF) trustees is integral to ensuring the continued successful management of an SMSF.
This article considers potential issues that can arise between SMSF trustees, as well as a number of preventative steps.
Sibling rivalry in the office of trustee – Notaras v Notaras
Some combinations of trustees are more unwise than others. This is illustrated well by the recent New South Wales Supreme Court decision of Notaras v Notaras [2012] NSWSC 947 ('Notaras').
The facts of Notaras are hinted at by the case title, representing an unfortunate dispute between two brothers. The plaintiff (Basil) was the brother of the defendant (Brinos).
Both were the only trustees and members of an SMSF.
Relations between the two brothers had soured. In December 2010, Brinos had made withdrawals of over $220,000 from the SMSF's bank accounts. This was $57,839 more than Brinos was entitled to as a member.
In addition, Brinos did not sign a number of compliance documents such as tax returns (in his capacity as trustee) – resulting in the SMSF breaching various compliance requirements.
Basil sought an order (pursuant to s 70 of the Trustee Act 1925 (NSW)) that Brinos be removed as a trustee and replaced with a company.
The company, Bazport, had Basil as the sole director and shareholder. Other states and territories usually confer similar powers on courts (eg, s 48 of the Trustee Act 1958 (Vic)).
The order was granted. As a result, Basil and Bazport needed to seek permission from the ATO to have the SMSF exempt from the relevant trustee-member requirements of s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) ('SISA').
The eventual result of Basil's request to the ATO will probably not be made public.
Further, resolving the dispute via the Supreme Court was likely to have been time-consuming and costly.
The case shows that one should think carefully before starting an SMSF with a sibling, especially where there are shared business interests.
Decision making – must it be unanimous?
Related to the issues raised by Notaras is the topic of trustee decision making.
There is a general law principle that, where joint trustees are appointed, they must act unanimously.
This was affirmed by Kaye J in Beath v Kousal [2010] VSC 24 [18] (12 February 2010).
This means that it is near impossible to make decisions if joint trustees do not agree.
However, this general position can be modified by the governing rules (usually annexed to the trust deed) providing that decisions can be made in some other manner. In practice, not all governing rules will provide for this.
Removal of a trustee
A properly drafted SMSF trust deed can provide for a procedure by which a trustee can be removed, and a new one appointed.
If there is a corporate trustee then the decision-making process will be outlined in the constitution of the corporate trustee.
An appropriate process may be that the member(s) who have greater than half the total account balance are able to appoint a new trustee and remove an existing one.
Interestingly, the Notaras decision did not contain any discussion of the trust deed or governing rules of Basil and Brinos' SMSF.
It is likely that the governing rules of the SMSF did not have adequate power for Basil to remove Brinos.
Additionally, the governing rules also determine whether the power to hire and fire a trustee (ie, the appointor power) comes with fiduciary obligations attached, such as the obligation to exercise the power in good faith (Berger v Lysteron Pty Ltd [2012] VSC 95).
Unless the rules provide that the power does not have to be exercised in good faith, the decision to remove and appoint a trustee may be subject to attack on various grounds.
Accordingly, to protect the interests of the members with the majority of benefits, governing rules should ensure that the appointor power can be exercised without associated fiduciary duties (these duties would be similar to those of a trustee).
Forcibly removing a member
A trustee who cannot agree with fellow trustees may also be a member of the SMSF. Is it possible to forcibly remove the person as a member?
The governing rules can provide for a mechanism to remove a member.
However, the larger hurdle is reg 6.29(1) of the Superannuation Industry (Supervision) Regulations 1994 (Cth), where the only way to transfer benefits out of a fund without a member's consent is if the transfer is to a 'successor fund'.
In practice, it would be difficult the meet this requirement if the member was to transfer to a 'large' fund, or to a new SMSF.
A more practical solution may be for the aggrieved party to remove themselves from that fund (and roll over their member balance into a new SMSF).
Conclusion
The problem of an uncooperative trustee can prove extremely difficult due to the law of trusts, as well as laws protecting the interest of members of superannuation funds.
This can be made more difficult by documents that do not confer strategic powers. Carefully drafted trust deeds and governing rules, as well as good initial planning, can assist with or prevent such problems.
David Oon is a consultant and Nathan Papson is a lawyer at DBA Lawyers.
