Key lessons on conflict of duty in SMSF death benefit case
The recent decision on the Re Marsella case highlights how easily conflicts case arise and the implications for trustees where they’re not appropriately managed, says an industry lawyer.
Earlier this month, the Supreme Court of Victoria made the decision to remove two individuals as trustees of an SMSF on the basis that they had failed to exercise their discretion with a real and genuine consideration of the interests of the fund’s beneficiaries. You can read more about the case here.
Re Marsella  VSC 65 involved the Swanston Superannuation Fund, established by Helen Marsella and her daughter from a previous marriage with Caroline Wareham.
Ms Marsella died on 27 April 2016 and was also survived by her husband of 32 years, Riccardo Marsella.
Kimberley Noah from DBA Lawyers said that this case considered a number of important issues relating to conflict, particularly where personal conflicts and relationship breakdowns arise that preclude trustees from exercising their duties impartially and as part of the proper administration of the trust.
“The court found that significant personal acrimony existed between the Caroline and Riccardo that impacted her ability to discharge her duties as trustee and that the deceased did not foresee and consent to such a conflict merely by virtue of appointing Caroline as a co-trustee at the inception of the fund,” Ms Noah said.
“In this case, the trustees’ lawyers sought to deny that a conflict had arisen; however, Justice McMillan rather characterised this downplaying of the conflict as ‘ignorance or deliberate mischaracterisation of the true circumstances at hand’, holding that a substantial conflict did, in fact, exist between Caroline and Riccardo.”
Ms Noah said that this aspect of the case is significant as it illustrates how easily conflicts can arise in an SMSF context.
“ATO data indicates that approximately 90 per cent of funds are two-member funds, and these are likely to predominantly involve married couples, and upon the death of the first spouse, it is very likely that the surviving spouse may be placed in a position of potential conflict in relation to their trustee role,” she cautioned.
“If these foreseeable conflicts are not appropriately managed, many SMSFs that become managed by the surviving spouse following the death of their spouse could stray into breaching their fiduciary duties.”
The case also demonstrates the important of trustees exercising their discretion with good faith, said Ms Noah.
In its decision, the court noted that discretion must be exercised in “good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred”.
“Generally, the courts will not look at the outcome itself, but where the result is, in the words of Justice McMillan ‘grotesquely unreasonable’, this may form evidence that the discretion was not properly exercised or was mala fides,” Ms Noah explained.
Justice McMillan said the question of whether a trustee acted in good faith, with a real and genuine consideration will depend upon the considerations and inquiries the trustee made, their reasons for, and manner of exercising their discretion.
“Indeed, all trustees must inform themselves before making a decision to ensure the discretion is exercised with a real and genuine consideration for the purpose for which the discretion was conferred,” said Ms Noah.
“As a corollary of this principle, [the] trustee must not take irrelevant considerations into account and must not fail to take relevant considerations into account. In this case, the court noted at that Caroline’s purported good faith was impugned by ‘ignoring the plaintiff’s substantial relationship with the deceased and relatively limited financial circumstances’ which were relevant considerations.”
Advisers must remember that although a trust deed may, among other things, afford a trustee with absolute discretion, the discretion must still be exercised in good faith and with due regard to relevant considerations, she said.