Facts
The Photography Management Services Pty Ltd Superannuation Fund (Fund) was established by deed dated 31 May 1995. The Founder and initial trustee of the Fund was Photography Management Services Pty Ltd (PMS). The directors of PMS and members of the Fund were Mr Hayne and Ms Moss.
On 25 July 2005, Mr Hayne died. At the time of his death, Mr Hayne’s interest in the Fund amounted to $710,820.85. At some point, Mr Hayne’s solicitor and executor, Mr Sundberg, was appointed a director of PMS alongside Ms Moss.
On 30 May 2006 PMS purported to resign as trustee of the Fund and the remaining member of the Fund, Ms Moss, purported to appoint Moss Super Pty Ltd (Moss Super Pty Ltd) as trustee of the Fund. Ms Moss was the sole director of Moss Super Pty Ltd.
Dispute
This case dealt with two issues. The first issue to be decided was whether Mr Hayne’s interest in the Fund (Interest) should be dealt with pursuant to the terms of the Fund’s deed (SMSF Deed) or as part of his estate under his will. While this article does not discuss the reasoning behind this point, it was found that the Interest was properly dealt with under the SMSF Deed.
Had the Interest been paid to Mr Hayne’s estate, the Defendant (a child of Mr Hayne) would have received a portion of the Interest. As the Interest was to be dealt with in accordance with the SMSF Deed, the trustee of the Fund was required to exercise a discretion as to which beneficiary would receive the Interest.
The second issue in contention, which is the basis of this article, related to whether the purported resignation of PMS and appointment of Moss Super Pty Ltd as trustee of the Fund was carried out in accordance with the SMSF Deed.
The Defendant contended that the appointment of Moss Super Pty Ltd as trustee of the Fund was ineffective as she preferred that the discretion as to the disposition of the Interest not be exercised by Moss Super Pty Ltd which was controlled by Ms Moss alone.
Attempted change of trustee
Under the SMSF Deed the Founder was obliged to appoint a person or company to fill the office of trustee when this office was vacant. It is not clear if the SMSF Deed itself provided the trustee with the ability to retire, however, the relevant state trustee acts or general law will likely permit a trustee to retire from their office should a deed be silent on this issue.
By letter addressed to the Fund the directors of PMS purported to tender the resignation of PMS from the office of trustee of the Fund. It was accepted by all parties that this was a valid resignation by PMS which the court agreed with.
The sole member of the Fund, Ms Moss, purported to both remove PMS and appoint Moss Super Pty Ltd as trustee of the Fund by a member’s resolution. This resolution was ineffective in achieving both of those purposes.
PMS’s resignation was effected by its own accord and the member’s resolution was not required to achieve this, nor could it. Further, as the power to appoint a trustee when this office was vacant was vested in the Founder, only PMS could validly appoint a new trustee once the trustee (being PMS in a different capacity) had resigned.
While Moss Super Pty Ltd purported to consent to its appointment as trustee of the Fund, this was ineffective as it had not been so appointed. The Court found that the resignation of PMS was effective but that the appointment of Moss Super Pty Ltd was invalid. Accordingly, the office of trustee was vacant from the time PMS resigned.
Conclusion
This case demonstrates the importance of ensuring that the procedures set out in a fund’s deed are followed whenever making any changes to a fund. A common pitfall for advisers is not recognising that parties may have multiple roles as part of an SMSF and that these roles must be respected. Justice Byrne makes the point in this case that:
If parties have, no doubt for good reason, established a complicated legal structure such as this, they must respect it. And where they have, as here, multiple roles to play they must respect the conflicts which may arise.
This statement reflects the concept that an entity may have a number of roles within an SMSF which are distinct and do not merge. It is imperative that where a power is vested in a particular role an entity must be acting in that role when it exercises that power.
A simple way for advisers to explain this concept to their clients is to use the metaphor of an entity being able to wear multiple ‘hats’ within the context of an SMSF. Common roles or hats that can be worn include that of member, trustee, employer and founder. Each of these roles will come with its own responsibilities and powers under the fund’s deed.
When purporting to exercise a power it must be clear that an entity is exercising that power in its capacity of the role that holds that power. That is, it is wearing the right hat at the right time. In a document where a party holds multiple roles they must be clearly seen to wear these different hats when exercising the different powers. To show this, an entity should be a party to a document in each distinct capacity and execute the document in each of these capacities.
There are significant risks involved with not properly documenting a change of trustee. To ensure this validly occurs a lawyer should be engaged to review the fund’s deed, identify the relevant powers and prepare appropriate documentation which follows the necessary procedures. This will ensure compliance with the fund’s deed and minimise the risk of legal challenge or additional cost in the future.
By Shaun Backhaus (sbackhaus@dbalawyers.com.au), Senior Associate and Daniel Butler (dbutler@dbalawyers.com.au), Director, DBA Lawyers
Could we have a follow up article on why the deceased member’s benefit might have been dealt with under his will rather than through the SMSF? More interesting and relevant.
This is a 2008 decision so hopefully not too many like it floating around. The SMSF trust deed had the (fairly) standard provisions concerning the payment of death benefits. There was no prescription that the benefits were to be paid to the legal personal representative (Executor) and, there was no nomination by the member to indicate that was his preference.
Super can only become an estate asset if the deed allows the LPR to be a beneficiary, and the trustee exercises discretion to pay the death benefits to them or, the member has a valid nomination on file that overrides trustee discretion and states the benefits are to be paid to the member’s LPR. Again, the terms of the trust deed provide the authority for member nominations for SMSFs.
The trustee held the power to determine the payment of the death benefit however, the Court found there wasn’t a validly appointed trustee so that became the issue to address not, whether the estate had an interest.
[NSW includes super as a part of the notional estate and thereby death benefits can find there way to the LPR however, this was a Victorian case where there wasn’t any such provision available.]
The case is relevant as it is a timely reminder that SMSFs are governed by the trust deed which, although it can’t expand the law that applies to super, it can restrict it and, in addition, it provides the authority for many actions. It must be consulted at every step of the way and particularly around issues to do with succession. Once the member has passed, disputes are thrashed out by the legal system and the first document reviewed will be the trust deed.
Hopefully many of these ‘sleeper’ issues were rectified in some or all capacity in the 2018 changes when many had to update deeds etc with the introduction of the transfer balance cap.
This is just another big risk area for auditors, particularly low cost auditors where there is limited capacity to research the funds history when being engaged by a client.
The problems of old deeds with founders. What would happen if the founder had passed away (it could have been Mr Hayne) or a corporate founder had been sold off, wound up etc?