How to deal with SMSF trustee disputes
Everyone goes through the odd rough patch in their relationships with one another and self-managed superannuation fund (SMSF) trustees are no different. But the ramifications of a dispute between SMSF trustees are likely to be more severe than the average quarrel between friends because SMSF trustees have vested interests, established duties and legal responsibilities towards the fund, where if breached, can result in severe penalties.
How can disagreements between trustees come about?
SMSF trustees are required to sign a trust deed that requires them to adhere to certain responsibilities, some of which require them to:
- act honestly in all matters concerning the fund
- exercise skill and diligence in managing the fund
- act in the best interests of all members
- keep the money and assets of the SMSF separate from personal money and assets
- retain control over the fund
- develop and implement an investment strategy as well as make investment decisions
- not enter into contracts or behave in a way that hinders them or other trustees from performing or exercising function or powers
- allow access to information for all members, and
- not allow early access to the fund.
Together with all the superannuation laws – and the corporate trustee constitution in the case of corporate trusteeships – a trust deed forms an SMSF’s governing rules which will include such things as the duties and obligations of trustees, the payment of member benefits and fund administration.
Personal interpretation of how best to adhere to these duties can lead to disputes. For instance, an overriding requirement of every SMSF is that it fulfils the “sole purpose test” – that the fund is established to provide benefits to each member at retirement age or to a member’s dependants upon the member’s death. There are, however, various ways to achieve a common goal and disagreements are not uncommon.
Various issues can give rise to disputes. What to invest in and how much to invest can be a hotbed of discussion, because notwithstanding the fund’s written investment strategy, trustees can have different opinions on how best to satisfy strategies on diversification and asset allocation.
Other issues that regularly crop up are typically regarding the allocation and payment of death benefits, the end of business partnerships, treatment of business real property and disagreements between spouses.
Another area where disputes commonly occur is if the SMSF considers admitting new members into the fund. One trustee may be eager to bring in a family member or a new spouse that other trustees may have no wish to be financially involved with.
What are the best ways to prevent a dispute?
Disputes are unpleasant but they are unavoidable in many circumstances. They commonly arise when there are two or four trustees – a situation that serves as a breeding ground for deadlocks. Where there are three members, two can outvote one and where there is a single member (such as in a corporate trusteeship), no disagreements will arise – making a single-member SMSF the safest fund of choice.
Each trustee must act in the best interest of all fund members irrespective of any differences that emerge between trustees. For instance, a trustee cannot exclude another trustee from making decisions concerning the SMSF, cannot unlawfully withdraw money from the SMSF and must address each trustee’s requests – that is, when it comes to requests to redeem assets and transfer super savings into another superannuation fund.
Trustees can establish certain “deadlock-breaker” provisions – provided there is more than one trustee in the fund – to minimise the likelihood of disputes:
- carry out a trustee decision only if a simple majority of trustees agree to it, or if a unanimous vote by all trustees is made,
- make a notice of a trustee meeting in writing with a minimum notice period,
- allow voting by proxy, telephone or email, or to be more strict, stipulate that if a trustee cannot attend a meeting, they do not get a vote on decisions dealt with at that meeting, and
- conversely, only allow decisions to be made if all trustees are physically present at a meeting.
The trust deed is typically the first port-of-call in a dispute. Trustees of SMSFs should consider inserting dispute resolution measures or advance guidance on how disputes can be approached into their trust deed. A handy way to prevent the mismanagement of assets in the case of a dispute is to use safeguards such as joint bank account signatures.
What are the best ways to resolve a dispute?
If a dispute is well and truly underway, there are steps in place to ensure the matter is dealt with. Disagreements can either be settled through alternative dispute resolution techniques – such as mediation, conciliation and arbitration – or via a court hearing for more serious cases.
The ATO is not involved in resolving disputes between trustees unless the dispute is over a breach of superannuation law, and even then any intervention is to iron out regulatory issues. The ATO can provide general advice about your options in resolving disputes, but cannot provide specific guidance so there is little regulatory assistance for SMSF trustees. Consult this office for more advice in the event of disputes.
Those SMSFs that use a corporate trustee structure may have mechanisms to deal with dispute resolution through the Corporations Act and regulations or may be able to obtain guidance from the corporate trustee’s constitution.
No compensation scheme exists for SMSFs in the case of disputes, but APRA-regulated SAFs have more readily available redress options including a grant of financial assistance as statutory compensation and access to the Superannuation Complaints Tribunal which deals with complaints about the decisions and conduct of APRA-regulated fund trustees. You may wish to read the article in the October Monthly Client Newsletter entitled SMSF or SAF: Which Super Fund Option Suits You? if you want to know more about the differences between the two types of funds. Contact this office if you have not got a copy.
Throughout the dispute resolution process, trustees must ensure their fund remains compliant with superannuation law. One important step that should not be overlooked is the updating of legal documents in the aftermath of a dispute where a trustee has left the fund.
If a fund does not comply with superannuation law during a dispute, the ATO can deem the fund non-compliant – which is more than a slap on the wrist as this will remove the SMSF concessional tax treatment and tax the fund at the highest marginal tax rate, 45%.
Measures can be carried out to mitigate disputes, but the fact remains that SMSFs with more than one trustee will never be completely immune from disagreements. That aside, a well-drafted trust deed, a rational outlook as well as prudent planning can assist with or better still prevent such disputes from arising.
Consult this office for tips, advice and assistance in preventing and resolving disputes within an SMSF.