This article examines some of the key issues that can arise when change of trustee documents are not properly completed, and by the right people using quality document suppliers.
What happens if a change of trustee is not properly completed?
A change of trustee requires compliance with the provisions in the fund’s governing rules and relevant legislation which invariably includes the Superannuation Industry (Supervision) Act 1993 (Cth), Corporations Act 2001 (Cth) and applicable state legislation. Unless a proper change of trustee is effected, serious adverse implications can arise including:
- Other documents executed by the purported trustee being invalid. We have found this on numerous occasions where the company that was proposed to be appointed as trustee, then executed a deed of variation which was invalid. The deed of variation was invalid as the change of trustee was ineffective as the old trustee was still in office.
- A party acting that purports to act as trustee without proper authority may be left without any indemnity against the asset of the trust and is liable for any expenses and liabilities incurred while purportedly acting as trustee including potential legal costs.
- Third parties especially banks, investment institutions and purchasers not recognising the entity that purports to act as trustee.
- The fund being unable to function whilst it awaits the outcome of costly and time consuming legal and possibly court proceedings required to confirm the correct trustee position.
- Advisers involved in implementing invalid documents or not spotting issues being embroiled in costly and lengthy legal battles.
What kind of actions may be required?
There is no standard method for changing a trustee. The criteria in the particular SMSF deed needs to be carefully followed. This may require certain actions to be taken by certain parties to validly effect a change of trustee. For example, the deed may require the change of trustee:
- power must be exercised by a specific entity (eg, the existing trustee and/or the members, principal employer or some other party);
- cannot occur without the consent of a specific entity;
- must be done by deed (rather than just by a trustee resolution and some deeds require a simple or special resolution, etc); or
- the appointment can only occur after the requisite notice period is given.
Under some deeds (that only allow individual trustees), the appointment of a corporate trustee can only occur if immediately afterwards, an SMSF deed update is undertaken that provide the rules for a corporate trustee.
While electronic execution is becoming more popular, we recommend against this practice for deeds given the complexity that usually applies to this process. Refer to our article Six simple rules to execute a deed that satisfies ALL Australian jurisdictions.
Some key steps to change a trustee
The typical steps required to change a trustee need to be considered and strictly followed before preparing the change of trustee documentation These include:
- A review of the prior document trail ― preferably each prior deed and deed of change of trustee is carefully reviewed to determine the most appropriate provisions that apply to changing the trustee. This review should also ascertain what documents have been validly executed to determine what constitutes the operative deed. (Note that DBA Lawyers’ offer an SMSF Deed History Review service).
- In cases where the deed is out of date and does not have clear power to undertake a change of trustee, undertaking an SMSF deed update first is recommended to ensure there is clear and appropriate power. (Click here for DBA Lawyers’ SMSF deed update)
- A review of applicable legislation — this may include the applicable Trustee Act and stamp duty legislation of the relevant jurisdiction. In some cases, an SMSF deed does not contain adequate or clear power, and reliance on the provisions in the Trustee Act of the relevant jurisdiction is required.
- Ensure the appropriate parties are added to the deed — ensuring that all parties required to effect a change of trustee in the correct capacity is a key foundation of an effective change of trustee. If a party has lost capacity and is no longer in existence, eg, a principal employer that has been liquidated, expert legal advice should be obtained.
- Documenting the change — depending on the above, the change of trustee documents invariably needs to be drafted to comply with the fund’s governing rules and related factors (eg, resolutions, notifications and deed). The DBA Lawyers’ change of trustee document also includes a range of other ‘safeguarding’ provisions such as clearly expressing when the liability of the current trustee ceases and when the liability of the new trustee commences.
Technical deficiencies can be critical
It is critical to note that if there are any deficiencies in the appointment of trustees, that any subsequent deed amendments are likely to be invalid. For example, if a deed purports to appoint a corporate trustee and remove two individual trustees which is deficient, then that company would not be validly appointed as a trustee. Consequently, subsequent deeds executed by that company would be invalid as the company was not properly appointed in the first place.
The case of Moss Super Pty Ltd v Hayne [2008] VSC 158 (Moss Super) provides a good example of how a party acting in the wrong capacity resulted in the deed of change of trustee being rendered invalid.
Moss Super involved a dispute over the benefits of a deceased SMSF member, Mr Hayne. After Mr Hayne’s death, his partner Ms Moss sought to change the SMSF trustee to Moss Super Pty Ltd (a company of which Ms Moss was the sole director). The appointment power in the SMSF deed required the founder to appoint any new trustee. Ms Moss was a director of the founder company. However, when executing the change of trustee documentation, Ms Moss signed in her capacity as the sole remaining member of the fund only and not in her capacity as director of the founder company.
The result, the court found, of the deficient documentation was that the change of trustee was invalid. Ms Moss’ attempt to take control of the SMSF was therefore blocked. An extract from paragraph 30 from Moss Super sums up the position as:
If parties have, no doubt for good reason, established a complicated legal structure such as this, they must respect it. And where they have, as here, multiple roles to play they must respect the conflicts which may arise.
Serious issues for getting it wrong
While it has become common for non-lawyers to prepare such documents, it is recommended that you instruct a lawyer to review the document trail and prepare the change of trustee documents. Drafting documents can be considered the provision of legal services and therefore financial advisers and accountants need to be aware of the risks involved with undertaking such work and they may not be covered by professional indemnity insurance and may not be able to recover any fee for this task (eg, refer to The case where an accountant provided advice on NSW duty legislation Galea v Camilleri; The Estate of Patricia Camilleri [2023] NSWSC 206 at [939] to [968].
Conclusions
The process, steps and documents to change of trustee are often more complex than varying an SMSF deed. Any error or shortcoming can result in substantial and serious ramifications and costs. We therefore recommend instructing a lawyer to undertake this work.
Naturally, DBA Lawyers would be pleased to assist.
Related articles
- Changing SMSF trustees- why advisers should be more alert to the tips and traps
- Leave SMSF change of trustee to the lawyers
- Perry v Nicholson [2017] QSC 163: important lessons on SMSF succession planning
- The trustee-member rules explained: Part 1
- The trustee-member rules explained: Part 2
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice should be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler ([email protected]), Director, and Cassandra Hurley, Lawyer ([email protected]) DBA Lawyers
29 November 2023
