Control of your self managed superfund – attorneys and executors as trustees in place of fund member

The Supreme Court of NSW has recently examined the rules relating to financial attorneys and executors stepping in as trustees in place of a self managed superfund (“SMSF”) member and considered if a particular appointment of trustee was valid.

The Relevant Law

In order for a SMSF to be eligible to receive the various tax concessions that are granted to superannuation funds it is necessary that it complies with the requirements of the Superannuation Industry (Supervision) Act 1993 (“the Act”) and regulations made under the Act. One of the key compliance requirements is in relation to who must be a trustee of a SMSF.

Section 17A of the Act provides that (in brief) each member of a SMSF must also be either:

  • A trustee of the SMSF; or
  • A director of a company which is trustee of the SMSF (a “corporate trustee”).

If the member is not able to personally act as the trustee, or director of the corporate trustee, then this does not cause the SMSF to be non-compliant provided that:

  • The enduring financial attorney of the member acts in their place; or
  • If the member is deceased, their executor acts in their place.

There is also a 6 month grace period in the Act if there is a temporary non-compliance with the trustee requirements.

The Facts – Dawson v Dawson [2019] NSWSC 826

The Dawson Superannuation Fund (“the Fund”) was established by husband and wife, Peter and Estelle. They were the only members and individual trustees of the Fund. Both of them had children from previous relationships.

Peter had:

  • Appointed his son Tony (step-son to Estelle) as his enduring financial attorney; and
  • Completed a Will nominating Estelle’s son-in-law, George, as his executor and leaving most of his estate to Estelle (notwithstanding they were in the process of separating at that time).

Peter became too unwell to continue as a trustee of the Fund and a deed was executed by Tony (in his capacity as financial attorney for Peter) and Estelle to nominate Tony as a replacement trustee for Peter. This deed was validly executed in accordance with the terms of the Fund trust deed and meant that the Fund was compliant with section 17A of the Act at that time.

Peter then died and there was a death benefit of $1.387M payable from the Fund on his behalf. Peter did not complete any binding nomination, so under the trust deed the trustee had discretion as to who was to receive payment of the death benefits.

George obtained probate for Peter’s estate and he and Estelle then executed a deed, without Tony’s agreement, which nominated George as a trustee of the Fund in place of Tony. They argued that:

  • This was on the basis that Tony’s position as trustee was linked to him being the financial attorney for Peter and that his role as trustee had therefore automatically ended with Peter’s death; and
  • It was necessary for George, as Peter’s executor, to become a trustee in order for the Fund to remain compliant.

Tony commenced proceedings seeking a declaration that he was still a trustee of the Fund and that the deed appointing George was invalid. Of course, the relevance of this was who would be the trustee for the purpose of deciding payment of the death benefit.

The Decision

The Court found that:

  • The appointment of a trustee is personal in nature. This means that even if the trustee is the financial attorney of a member they will not hold the trustee role in their capacity as an attorney. They are therefore not automatically removed if the role as financial attorney ceases.
  • The question of whether a trustee has been validly appointed or removed depends on the terms of the trust deed. In the circumstances, the appointment of George as a replacement trustee was not valid as it had not complied with the terms of the trust deed and instead relied on an automatic removal of Tony by reason of his financial attorney role ceasing.
  • There is a difference between who should be the trustee to make the SMSF compliant and who is actually the trustee.
  • A deceased member generally continues to be a ‘member’ of a SMSF until their death benefit has been paid out. This means that their executor must become a trustee for the SMSF to be compliant.
  • It was likely the Fund was not compliant and while that was not the issue before the court, it was an issue the parties would need to address (probably with the ATO!).

Key Lessons

This case highlights:

  • That it is crucial to read the trust deed whenever you are dealing with the control of an SMSF. Failing to validly appoint and remove trustees in accordance with the trust deed will make the appointments invalid and the Court will not intervene to rectify a non-compliant fund.
  • The importance of comprehensive estate planning that considers both incapacity and death.
  • Binding death benefit nominations remain a crucial estate planning tool – the issue in this case would probably never have arisen if the trustee did not have discretion for payment of the death benefit.
  • Trustee roles impose personal obligations on the trustee – they are not held subject to the terms of any power of attorney.  

If you require further information regarding your self managed superfund, please do not hesitate to contact us.