Tuesday, March 28, 2023

I want it all** - Duties of SMSF trustees and yet another case concerning death benefit payments

In recent years the number of reported decisions in relation to death benefit payments by SMSFs have increased significantly. This is particularly so given that for many years the only substantive decision was from 2005, namely the case of Katz v Grossman [2005] NSWSC 934.

The decision in Re Marsella; Marsella v Wareham (No.2) [2019] VSC 65 provides another example of the types of issues that need to be considered in this area, and is particularly interesting given that there were some aspects analogous with the Katz decision, and yet the court reached the opposite conclusion.

Briefly in the Marsella case:
  1. the deceased was the sole member and a co-trustee with her daughter of an SMSF (similar to Katz);
  2. while historically a binding nomination had been signed, it had lapsed; and in any event was invalid as it nominated the member's grandchildren (who were not dependants as defined under the superannuation laws);
  3. the daughter appointed her husband as the co trustee following her mother's death (similar to Katz);
  4. the deceased's will provided certain benefits to her second husband. All remaining assets under the estate then passed equally to her daughter and her son (similar to Katz);
  5. the daughter and her husband resolved to distribute 100% of the death benefit to herself ignoring her brother (again similar to Katz) and her step father.
Unlike Katz, where the daughter was entitled to retain the entirety of the death benefit, in Marsella the payment was held to be invalid and the daughter and her husband were removed as trustees of the SMSF.

The court listed a number of reasons for reaching this conclusion, including:
  1. the daughter acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties and the way in which the superannuation laws are structured in this area;
  2. the daughter acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict;
  3. as a result she was not in a position to give real and genuine consideration to the interests of the dependants;
  4. the above conclusion was supported by the outcome of the exercise of discretion, which itself was contrary to one of the daughter's key arguments - that being that her mother wanted the daughter and the brother (and the grandchildren) to benefit from the death benefit; and yet she paid 100% of the benefit to herself;
  5. ultimately, the court believed that the outcome of the daughter's decision was ‘grotesquely unreasonable’ which helped support the conclusion that the discretion was never properly exercised, or was exercised in bad faith;
  6. thus, the fact that the daughter was within the class of potential objects did not negate her duty to exercise the power in good faith, upon real and genuine consideration, and for proper purposes.
The above conclusions were upheld on appeal, and that decision will be explored in next week’s post.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, an obvious choice, with Queen and 'I want it all'. 

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Tuesday, March 21, 2023

The (heavy) duty** to account

A reminder came to me recently about the duty of trustees ‘to account’.

Relevantly the High Court in Byrnes v Kendle [2011] HCA 26 highlighted that the term 'duty to account', encompasses several important obligations:
  1. A duty to keep records;
  2. A duty to report to the beneficiaries or the court concerning the administration of the trust; and
  3. The duty to pay amounts, the trustee is obliged to pay to the beneficiaries.
The trustee's duty to account is a fundamental fiduciary obligation imposed upon a trustee.

In discharging that duty, the trustee is required to keep proper accounts of the trust.

Importantly however, in relation to the right of a beneficiary to request information from a trustee, there is likely to be a divergence in terms of the level of detail a trustee of a discretionary trust is required to provide a beneficiary, as opposed to the trustee of a unit or fixed trust.

In particular, in relation to discretionary trusts, where each beneficiary only has a mere expectancy (that is, as explained in other View posts, the right to be considered), the duty to account imposed on a trustee is likely to be less onerous than for fixed trusts.

This is because the trustee of a discretionary trust also has a duty to act in the best interests of all beneficiaries - which means disclosure of certain information on demand of some beneficiaries may not in fact be appropriate, if the trustee on reasonable grounds so decides.

Practically, where there is contention around these issues it may be the conclusion in Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] 2 A.C 709 is most relevant. In this case it was relevantly held that a beneficiary's right to seek disclosure of trust documents and accounts, is best approached as one aspect of the court's inherent jurisdiction to supervise, and if necessary intervene in, the administration of trusts.

The nature of any court's intervention will depend on the court's discretion on a case by case basis.

In particular, the court will determine:
  1. whether a discretionary object (or some other beneficiary with only a remote or wholly defeasible interest) should be granted relief at all;
  2. what classes of documents should be disclosed, either completely or in a redacted form; and
  3. what safeguards should be imposed (whether by undertakings to the court, arrangements for professional inspection, or otherwise) to limit the use which may be made of documents or information disclosed.
As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, ‘Heavy Duty’ is a song from Spinal Tap. 

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Tuesday, March 14, 2023

Stamp duty concessions for business succession: it is (not) just a game**

As we have touched on in previous View posts, each Australian state has a different set of stamp duty rules.

In a very general sense, the broad themes under each state’s legislation are similar.

As is often the case however the detail of particular provisions can provide quite stark contrasts.

This week, I had a timely reminder of the differences between states in relation to the stamp duty concessions available for the transfer of assets under a succession plan from (say) parents to their children.

Under the New South Wales legislation, there are a number of flexibilities with this concession, including (in certain circumstances) the ability to transfer assets out of a company into the individual names of the children of the shareholders.

In contrast, the Queensland legislation (which is in fact broadly modelled on the New South Wales legislation) has no equivalent exemption.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Regurgitator song ‘Black Bugs’.

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Tuesday, March 7, 2023

Do you know Hoo(doo) is your customer?

In recent times, we have had a number of situations where, when acting for a family group, one member of the group is particularly concerned about asset protection issues.

All advisers providing guidance in this space should be aware that from a privilege perspective, much can turn on very practical issues such as:
  1. Who the customer is defined as being?
  2. In what name the file is opened up in?
  3. Who the correspondence is directed to (including via email)?
  4. Who is invoiced?
  5. Who pays the invoice?
While each of these issues can on their face seem quite benign, if the worst turn of events occurs (and bankruptcy proceedings are commenced), each of the above points can become quite critical.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Hoodoo Gurus song 'Hoodoo you love'.

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