By Krishna Skandakumar (kskandakumar@dbalawyers.com.au), Lawyer, DBA Lawyers
Often self managed superannuation funds ('SMSFs') are
created with the best of intentions, whether to provide for a
second spouse, create a contingency for a child, entering property
ventures with a business partner, etc. But the most important
question — which is almost always overlooked — is what
happens if it all goes wrong?
This article examines the ability of an SMSF trustee to forcibly
remove a member. However, it starts by asking a preliminary
question: what happens when trustees cannot agree?
Do trustees have to act unanimously?
Strictly speaking, trustees must act unanimously. Or, to phrase
this another way, if trustees cannot agree, no valid decision can
be made. This is a well-established principle of trust law famously
stated in the case of Dawson v Dawson [1945] VLR 99 as
follows:
... trustees can only act if unanimous, and so no course of action
can be decided upon or given effect to unless all then agree that
it is desirable. Any attempt by a majority to carry on in defiance
of the decision of their co-trustee can be followed by appropriate
legal proceedings to ensure that only the unanimous decision be
given effect
Further, Street J in Sky v Body (1970) 92 WN (NSW) 934
stated:
Inherent in this basic system of trusts is the principle that
trustees must act unanimously. They do not hold several offices
– they hold a single, joint, inseparable office. If
conflicting business considerations lead to such a divergence that
the trustes are not able to act unanimously, then the simple
position is that they cannot act.
Therefore, on first blush, if SMSF trustees cannot agree, they
cannot act.
How can this be prevented?
The above position can be displaced by the trust instrument, as
discussed by Slattery J in Dulhunty v Dulhunty [2010]
NSWSC 1465:
The principle that trustees of private trust must agree
unanimously to a course of action may be displaced if the trust
instrument provides otherwise, as it does here: Re Butlin's
Settlement Trusts; Butin v Butlin [1976] Ch 251.
Therefore, the real position is, if SMSF trustees cannot agree,
they cannot act — unless the SMSF governing rules says
otherwise.
Accordingly, there are various ways of addressing this situation
preemptively. One way is to ensure that the governing rules of the
SMSF allows for weighted votes in proportion to member balances for
some types of decision (eg, appointing or removing the
trustee).
Additionally, the governing rules of the SMSF may also specify
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 governing rules of
the SMSF provide that the appointor power does not have to be
exercised in good faith, the decision to remove and appoint a
trustee may be subject to various grounds of attack.
Accordingly, to protect the interests of the members with the
majority of benefits, the governing rules of the SMSF should allow
for weighted votes in proportion to member balances and should
allow for the exercise of the appointor power (ie, again, the
ability to hire and fire the SMSF trustee) without any associated
fiduciary duties. Few SMSF governing rules will actually provide
for this.
But what if the governing rules of the SMSF do not cater for this?
Can a trustee just 'remove' a member?
Forcibly removing a member
Unlike industry or retail superannuation funds, SMSFs do not
have the luxury of rolling members' benefits out where the
member is 'uncontactable' or 'lost'. Accordingly,
in the situation where a member/trustee cannot be found, refuses to
reply to correspondence, or generally refuses participation in the
management of the SMSF, SMSF trustees cannot rely on those
provisions — which large funds ordinarily rely on — to
send that member's benefits to the ATO or an eligible rollover
fund.
Further, reg 6.28 of the Superannuation Industry (Supervision)
Regulations 1994 (Cth) ('SISR') broadly provides that
a member's benefits in a superannuation fund must not be
transferred out of the fund unless the member consents. Therefore,
unless the member provides such consent to being rolled out, the
SMSF trustee cannot just 'remove' their entitlement from
the SMSF.
Again, there are ways of preemptively addressing this issue. One
method is to consider the member with the larger account balance
obtaining a certain 'upfront' consent from the other member
in both their capacity as a member and trustee of the SMSF. The
consent would operate such that, upon the occurrence of specific
events including material disagreement, relationship breakdown or
legal dispute, the trustee can use the consent to remove the other
member and transfer their benefit to another complying
superannuation fund.
But what if the governing rules of the SMSF do not cater for this very specific strategy?
Example
Consider Shane. Shane is a member of an SMSF. He has:
- a second spouse, Elizabeth; and
- an adult child from a previous relationship, Simone.
Shane and Elizabeth have over $1 million in the SMSF and invite
Simone to also become a member of the SMSF. Simone only has an
account balance of $10,000 (a contribution that Shane made to the
SMSF for Simone).
Accordingly, Elizabeth, Simone and Shane become the members and
individual trustees of the SMSF.
Some years later, Simone becomes addicted to drugs and alcohol,
and Shane and Elizabeth are unable to contact or find her. Can
Shane and Elizabeth forcibly remove Simone both as a member and
trustee?
Solution
From the guidance above, the strict answer — under most
deeds — is no. Shane and Elizabeth would need the consent of
Simone to roll her benefit to another fund and, further, they could
not make the decision to remove Simone as a trustee, without Simone
being actively involved in the decision making process (again,
generally all trustees must act unanimously).
However, practically, SMSF trustees might consider a range of
options. These may include:
- applying to the court — while this is the only option that removes most uncertainty, this process has its own uncertainty in regards to the time, costs and the final outcome. The time and costs associated with this course of action are likely to be substantial;
- Shane and Simone rolling their own benefits to another superannuation fund — that is, Shane and Elizabeth could transfer their benefits to another fund (perhaps a new SMSF) and leave Simone as the sole member/trustee of the existing SMSF. However, this solution poses its own problems. One of which is that it leaves Simone, a person who Shane and Simone ostensibly know is unable to maintain an SMSF, as the sole trustee and member of an SMSF. Further, it quite often requires the sale of most, if not all, of the existing SMSF assets (irrespective of market conditions). This process would also result in potential liability for Shane and Elizabeth if they acted without Simone's consent as a trustee;
- rolling Simone out of the SMSF (without her consent) — while this may appear to be an attractive solution for many SMSF trustees, it also has risk. Accordingly, before rolling the member's benefits out, at the very least, every attempt should be made to obtain the member's consent (including hiring a process server to show best endeavours have been used to locate her and obtain her consent). Evidence of these efforts should be retained. The main risk associated with this option is that Simone may allege — among other potential breaches of general trust law — the SMSF trustee has contravened the SISR by not obtaining her consent under reg 6.28; and
- seeking ATO guidance — finally, it may be possible for the SMSF trustees to obtain ATO input. However, it is important to note that, as the ATO broadly only have powers to administer tax and certain SMSF law, the ATO may not have any power to act and may simply decline to provide assistance. Thus, this option still has considerable uncertainty.
So what now?
Appropriate prior planning will minimise risk and uncertainty. As the old saying goes, plan with the end in mind. Thus, careful consideration and advanced planning should be given to an 'exit strategy', including whether:
- the SMSF governing rules are appropriate;
- certain members should only receive conditional membership;
- upfront consents to resign as a director/trustee are obtained; and
- consent on what is to happen to their member interest in the event they do exit (eg, nominate a suitable roll over fund).
Even after all of this, there is no guarantee that in the face of a dispute, everything will be 'smooth sailing'. However, having a pre-emptive plan or strategy in place can provide some clarity for SMSF trustees.
Conclusion
The simple solution to avoid the above issues is to carefully choose who to admit to your SMSF as a member. The laws applying to trusts, as well as the laws protecting the rights and interests of SMSF members can prove to be a difficult hurdle to overcome when dealing with uncooperative trustee/members. Alternatively, consider strategically drafted SMSF governing rules with appropriate supplementary documentation, as well as good initial planning, to minimise risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
