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Court holds SMSF trustees accountable

The recent case of Re Marsella [2019] VSC 65 (‘Re Marsella’) concerned a dispute over superannuation death benefits. This decision highlights the importance of SMSF trustees exercising their discretion to pay death benefits in good faith, with genuine consideration and in accordance with the purpose for which the power was conferred.

It is an important decision in the context of superannuation law as the Court ultimately removed the trustee on the basis that the discretion was not exercised appropriately.

Facts of the case

The case concerned the payment of death benefits from the Swanston Superannuation Fund (‘Fund’). Helen Marsella was the sole member of the Fund and her daughter from her first marriage, Caroline Wareham (‘Caroline’), was a co-trustee.

Helen Marsella died in April 2016, at which time her Fund balance was an estimated $450,416. She was also survived by her husband of 32 years and executor of the estate, Riccardo Marsella (‘Riccardo’).

Following the death, the relationship between Riccardo and Caroline became strained and a dispute arose when Caroline, as trustee of the Fund, appointed her husband Martin Wareham (‘Martin’) as a co-trustee. Immediately before Martin was appointed, Caroline exercised her discretion to pay the deceased’s death benefits in her own favour. Immediately after Martin was appointed, Caroline and Martin re-made the same decision to pay the deceased’s death benefits in Caroline’s own favour.

In response, Riccardo sought the removal of Caroline and Martin as trustees of the Fund, the appointment of a new independent trustee and the repayment of the death benefits with interest to the Fund. Riccardo made submissions that the trustees did not exercise good faith, with a real and genuine consideration of the interests of the Fund’s beneficiaries and accordingly the payment to Caroline should be set aside.

Caroline and Martin made submissions that the deed provided them with absolute discretion in relation to the payment of death benefits and submitted that they were not required to provide reasons for their decisions.

Key questions for the Court

The Court considered:

  • Whether Caroline and Martin properly exercised their discretion in good faith, with real and genuine consideration and for the proper purpose for which the power was conferred.
  • Whether Caroline and Martin should be removed.
  • Whether a new, independent trustee should be appointed in their place.

The decision on a failure to exercise proper discretion

McMillan J held that Caroline and Martin failed to exercise their discretion in good faith with a real genuine consideration of the interests of the Fund’s beneficiaries and subsequently removed Caroline and Martin from the office of trustee.

When considering whether their discretion was exercised appropriately, McMillan J looked at whether they had acted in good faith and in accordance with the conferred power’s proper purpose.

McMillan J emphasised that Caroline’s actions, particularly in relation to her arbitrary payment of benefits to herself was conducted with "… ignorance of, or insolence toward, her duties …" and was beyond "mere carelessness" or "honest blundering".

In the context of the improper exercise of discretion and the significant personal acrimony between Caroline and Riccardo, McMillan J held that Caroline and Martin were to be removed as trustees of the Fund. Moreover, it was held that Riccardo was to file further submissions for the appointment of an independent trustee to ensure that the Fund met the definition of a complying superannuation fund for the purposes of the Superannuation Industry (Supervision) Act 1993 (Cth).

Trustee duties of good faith and genuine consideration

It can be drawn from this decision that while an SMSF trust deed may afford unfettered discretion (eg, in relation to payment of death benefits), SMSF trustees must ensure that they exercise their discretion in "good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred". This is consistent with the well-established principles in Karger v Paul [1984] VR 161 regarding the proper administration of a trust and in what circumstances a trustee’s exercise of discretionary powers may be challenged.

Trustees must act impartially and in good faith. In Re Marsella, Caroline’s actions were found to be inconsistent with these standards. Among other things, she was found to have acted arbitrarily when distributing the death benefits to herself, with indifference towards her duties. McMillan J also found that Caroline had failed to properly inform herself in the proper discharge of her duties which required her to properly consider the estate as a potential beneficiary, and correspondence between her lawyer and Riccardo evidenced a dismissive tenor.

Moreover, this decision highlights the importance that trustees exercise their powers in accordance with the purpose for which they were conferred.

Where there has been a break down in relationships, SMSF trustees need to be especially mindful that they do not let any prejudices interfere with their proper exercise of trustee duties and high-handed communication with potential beneficiaries can be grounds for setting aside a decision in relation to the payment of death benefits.

What impact does this have for SMSFs?

In light of this decision, SMSF trustees should consider reviewing their SMSF succession planning to ensure the fund is properly managed on the loss of capacity or death of a member. In particular, SMSF trustees should ensure that the fund is placed in trusted hands and importantly, SMSF trustees should seek independent, specialist legal advice where uncertainties arise. This is particularly crucial where the fund has a significant balance or if there are any complexities.

 

Kimberley Noah is a lawyer, and Bryce Figot a special counsel at leading SMSF law firm DBA Lawyers. This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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