What happens when SMSF trustees don’t agree?

feature-court-drama-200The last thing on the mind of most new self-managed superannuation fund trustees is what might happen years down the track when they are unable to agree with their fellow trustees. Unfortunately, a number of things can sometimes go wrong with an SMSF’s management. There are several thorny issues to consider and a number of preventative steps you should think about taking.

Unwise combinations in the office of trustee

Often, as two or more people’s affairs intermingle (usually because they are family or business partners), the natural desire may be to start an SMSF to act as a vehicle to hold assets such as real property. Of course, there is nothing inherently wrong with this. No relationship is immune from conflict.

However, some combinations of trustees are more unwise than others. This is illustrated well by the recent New South Wales Supreme Court decision of Notaras v Notaras.

The facts of Notaras are hinted at by the case title, representing an unfortunate dispute between two brothers, Basil Notaras and Brinos Notaras.

Both were the only trustees and members of an SMSF. By 2011, relations between the two had soured over a separate property dispute that also reached the Supreme Court of New South Wales, which was decided in favour of Basil.

In December 2010, Brinos had made withdrawals of over $220,000 from the SMSF’s bank accounts. This was $57,839 more than Brinos was entitled to as a member. Subsequent to the withdrawals, the SMSF’s accountant (who was also Basil’s wife) sent a letter to Brinos, including tax returns and member statements that needed signing. Brinos returned the documents without signing them. While the judge in the case did not explicitly find that Brinos refused to sign them (partly because Brinos had not been expressly asked to do so in the letter), his Honour found that the ‘net effect…was that no further steps were taken… with a consequence that the trustees of the Fund [had] put themselves in breach of the Act’.

Basil sought an order that Brinos be removed as a trustee and replaced with a company. The company, Bazport, had Basil as the sole director and shareholder.

The order was granted. This was an unusual outcome in that it contemplated the trustees of the fund becoming both Basil, as well as his company Bazport. Because the judge still considered Brinos to be a member despite having only a ‘nominal interest’, the judge noted that Basil and Bazport would be seeking permission from the ATO to have the SMSF exempt from the relevant requirements of the Superannuation Industry (Supervision) Act. That is, an exemption would be sought from the requirement that each member is a trustee or a director of the corporate trustee.

The eventual result of Basil’s request to the ATO will probably not be made public. What is quite certain, however, is that the exercise of resolving the dispute via the Supreme Court was likely to have been time-consuming and quite costly.

The case therefore shows that one should think carefully before starting an SMSF along with a family member, especially where there are shared business interests. Further, there are other relationships that may present a higher degree of risk that a dispute will arise. These include: parent–child SMSFs, SMSFs with in-laws and SMSFs shared between business associates.

Decision making – must it be unanimous?

Related to the issues raised by Notaras is the topic of trustee decision-making.

There is a general law principle that, where joint trustees are appointed, they must act unanimously. This was affirmed by Kaye J in Beath v Kousal [2010]. This means that it is near impossible to make decisions if joint trustees do not agree.

However, this general position can be modified by the governing rules (usually annexed to the trust deed) providing that decisions can be made in some other manner. For example, deadlocks in trustee decisions could be broken if the governing rules provide that votes are weighted according to the member balance that each trustee has (if any). Not all governing rules will provide for this.

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