Background

The SMSF’s members were husband and wife who did not have children. The husband passed away in September 2014, leaving the wife as the sole member and director of the corporate trustee of the SMSF.

The wife met an American man on a cruise, and they formed a (long-distance) relationship. While they each lived in their own countries, they continued to spend time together, and the deceased described him as her partner. She included the partner in her will, gifting to him $1 million, a Lexus car, furniture and artworks, and a life estate in her Clontarf home.

Under a binding death benefit nomination (BDBN) signed a week before she died, she nominated her legal personal representative to receive 100 per cent of her superannuation to her estate; however, it was missing the second witness signature and was held to be invalid. Presumably, this was on the basis that the SMSF trust deed required two witnesses.

NSW Trustee and Guardian (NSWTG) was the surviving executor of her estate. NSWTG, as an entity, could not become a director of the SMSF corporate trustee, only its shareholder. It also declined to become the trustee of the SMSF. NSWTG, therefore, engaged a chartered accountant and registered liquidator, Heesh, to administer and wind up the SMSF and act as its sole director.

Heesh was concerned that his role was not in compliance with section 17A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) because he was not a legal personal representative of the sole deceased member nor her relative and that he sought to be remunerated for his role. He, therefore, after discussions with them, obtained an indemnity letter from the Australian Taxation Office (ATO) that the ATO would consider the circumstances and not issue a notice that the SMSF was non-compliant as long as the SMSF was wound up by 29 November 2024 or an extension was sought.

Heesh sought legal advice and commenced an extensive claim staking procedure and received information and submissions from NSWTG (as executor of the deceased estate) and partner. He also had extensive communications with the spouse via their respective lawyers.

Ultimately, Heesh, as director of the SMSF trustee, resolved to pay one-third of the death benefits in the SMSF to the spouse of the sole surviving SMSF member and two-thirds to her estate.

As a result of various allegations and communications with the spouse’s lawyers and as a result of legal advice, the SMSF trustee decided to apply to the NSW Supreme Court for legal advice on the following questions:

• The death benefit decision.

• Defending removal proceedings.

• Varying the fund trust deed.

• Can the director be remunerated?

• Can the trustee be indemnified?

Each of these issues will be considered in further articles in this series.

When will a court give a trustee advice?

The court set out three matters to consider in determining whether to provide advice:

• Whether the court has jurisdiction.

The jurisdiction test requires a question to the court in respect of the management or administration of the trust property, or the interpretation of the trust instrument. This includes the distribution of the assets of the SMSF.

The court found that was satisfied in this case.

• Whether the court should exercise its discretion to provide advice.

For the second test, the court noted that breaches (or allegations of) by the trustee do not preclude the giving of advice, nor is advice precluded where there are adversaries involved in the question.

In various ways, the court leaned towards encouraging applications for advice to be made to the court to save the parties from future increased expenses and preventable breaches.

Here, the court noted the fact that the SMSF trustee was in breach of trust (for having a non-complying director) was, among other reasons, a reason to seek advice, particularly in the context that there was no obvious solution to the director issue.

• The court must determine what should be done in the best interests of the trust.

The court confirmed that it is not the court’s function to take over the trustee’s discretionary function, to assess the commercial wisdom of the trustee’s decision, or to tell the trustee what to do. It is inappropriate for a court to give advice on decisions of a commercial nature.

The court’s role is to determine if the trustee’s proposed exercise of power will not be improper in the sense that it is not exercised in good faith, with real and genuine consideration, or in accordance with the purpose for which it was conferred, or it is exercised for an ulterior purpose.

Court decides to provide advice

Ultimately, the court decided to proceed with providing the advice. In particular, it noted:

“By this application for judicial advice, the court is asked to, effectively, endorse the trustee’s endeavours to resolve its breach of the trust rules. I consider that it is appropriate for the court to give advice or direction.”

This is an important first start for the SMSF trustee as it ensured that the various questions it asked (to be discussed in later articles) would be considered by the court.

It is also an important analysis for any trustees in difficult/disputed situations as to when, and to what extent, court advice can be sought.