Implications for SMSFs in recent family trust case

View Legal director Matthew Burgess explained that while the case was centered on a dispute involving distributions from a family trust, it has a number of lessons for SMSF trustees, particularly in relation to the matters a trustee must have regard to in the exercise of a power.

“Specifically, the judgment confirms that particularly for superannuation funds, the decision of a trustee may be reviewable for want of ‘properly informed consideration,'" said Mr Burgess in a recent article. 

“That is, if a trustee's consideration is not properly informed, it is not genuine.”

This means that the duty of trustees to properly inform themselves is more intense in superannuation funds than for discretionary funds, he noted.

In their decision, the judges referred to the High Court decision in Finch v Telstra Super Pty Ltd [2010] HCA 36.

Mr Burgess explained that in broad terms the Finch case concluded that the exercise of a discretion by a trustee is not subject to review by the courts, unless one of the following three factors is present:

• The trustee does not act in good faith;
• The trustee does not give real and genuine consideration to the exercise of the discretion and the purposes for which the discretion was granted; or
• Reasons for the decision are provided by the trustee, but those reasons are unsound.

“Furthermore, a trustee's decision cannot be reviewed unless on the material before the trustee it is one that no reasonable trustee could have made,” he stated.

“Given this test, best practice dictates trustees adopt a disciplined and detailed analysis of all possibly relevant issues before reaching a decision and clearly document their considerations.”

Mr Burgess said while documenting all investigations is critical, it is generally preferable to not formally record the reasons for the final decision as to do so unnecessarily exposes the trustee to a challenge based on having unsound reasons.

“The issues in this regard are critical for SMSFs that have multiple members, and in any situation where payment of a death benefit is being deliberated,” he cautioned.

The case, Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65, provides another example of the types of issues that need to be considered by trustees of SMSFs before making a decision on how to distribute a member’s death benefits, he noted.

In the Marsella case, the original decision was upheld essentially without any exceptions in the appeal case of Caroline Elizabeth Wareham and Martin Wareham (as trustees of the Swanson Superannuation Fund) v Riccardo Giacomo Marsella (both personally and as executor of the estate of Helen Freeth Marsella (also known as Helen Freeth Swanson)) [2020] VSCA 92.

The central arguments by the trustees on appeal revolved around their belief that they had exercised their discretion validly and therefore the payment of 100 per cent of the death benefit to one of the trustees personally should be reinstated, explained Mr Burgess.

The trustees stated that they did not believe that the deceased’s surviving husband — to whom she had been married for over 30 years — was not a beneficiary of the fund.

“This conclusion was plainly wrong,” said Mr Burgess.

“There was also evidence to suggest the trustees believed they owed ‘no duty to the estate or other beneficiaries’ — again an erroneous assumption.”

The evidence also supported a conclusion that the trustees had failed to look at the trust deed for the fund, which was a further breach of their duties, he stated.

“Ultimately, the court concluded that if the trustees did not exercise their discretion upon real and genuine consideration, there was no proper exercise of the discretion,” he said.

“The fact that the discretion could have been properly exercised in the same way as the trustee proceeded (i.e. to pay the benefit entirely to one of the trustees) could not alter that position.”