Ways to remove a member from an SMSF

By Daniel Butler, Director, DBA Lawyers

Removing a member from a self managed superannuation fund (‘SMSF’) is not a simple process, particularly where there is a dispute or some animosity among members. Here are some situations that DBA Lawyers has come across:

• family members have a falling out with a particular family member that they want to remove from the fund;
• a member wanting to exit an SMSF and rollover their superannuation to an industry superannuation fund is precluded from doing so since the other family members do not feel it is an appropriate time to realise certain investments; and
• former business partners that share the same SMSF with their respective spouses have a falling out and wish to part ways.

Unfortunately, poor quality SMSF documents and lack of prior planning complicate and prolong these disputes.

Rolling a member’s benefits from an SMSF

Broadly, reg 6.28 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’) provides that a member’s benefits in a superannuation fund must not be rolled over from the fund unless the member consents. Therefore, an SMSF trustee cannot simply ‘remove’ a member from the fund.

Conversely, if a member wanted to be transferred out of the fund, they would need the SMSF trustee’s approval. Remember that all members of an SMSF are generally trustees as well. So what happens when trustees cannot agree?

The general law is that individual trustees must act jointly (Beath v Kousal [2010] VSC 24). If trustees cannot agree, no valid decision can be made. Further, Street J in Sky v Body (1970) 92 WN (NSW) 934 stated that:

• Inherent in this basic system of trusts is the principle that trustees must act unanimously.  They do not hold several offices – they hold a single, joint, inseparable office.  If conflicting business considerations lead to such a divergence that the trustees are not able to act unanimously, then the simple position is that they cannot act.

Therefore, if the trustees cannot agree, they cannot act.

What does the deed say?

A well written deed may provide a solution if the trustees cannot agree. In Dulhunty v Dulhunty [2010] NSWSC 1465, Slattery J states that the principle that trustees must act unanimously can be displaced by the trust deed:

• The principle that trustees of [a] private trust must agree unanimously to a course of action may be displaced if the trust instrument provides otherwise …

For example, an SMSF deed may allow for weighted votes in proportion to member account balances.

Further, the SMSF deed may also require certain powers to be exercised in a fiduciary manner such as the power to appoint and remove a trustee (ie, the appointor power). A fiduciary power must be exercised for the benefit of all beneficiaries (Berger v Lysteron Pty Ltd [2012] VSC 95). Unless the SMSF deed provides that the appointor power is not a fiduciary power, it must be exercised for all beneficiaries or the exercise of that power could be subject to legal review.

Last resort

If there are no conditional memberships or powers in the deed to resolve the deadlock, the last resort may be to make an application to the court to remove the member. This process typically entails substantial time, costs and uncertainty regarding the final outcome. Further, unless there have been substantive breaches of trustee/director duties, the court may be reluctant to intervene and may not provide a practical solution.

With proper planning, one solution is to admit a member as a conditional member

One solution is to have an appropriately worded SMSF deed and to admit a member on a conditional basis. These members would be admitted as a conditional member. The consent would operate such that, upon the occurrence of specific events including material disagreement, relationship breakdown or legal dispute, the trustee of the fund could use the consent to remove the ‘conditional’ member and transfer their benefit to another complying superannuation fund. This option is cost effective, reduces risk and removes uncertainty.

In the case of a spouse who is to be admitted as a conditional member, a binding financial agreement is also recommended to minimise uncertainty.

Admit a conditional member

DBA Lawyers would be pleased to advise or prepare documentation in relation to conditional membership, please click here for further information.

Related articles

For more information about the advantages of a DBA SMSF deed, refer: http://www.dbalawyers.com.au/pensions/dba-lawyers-smsf-deed/.

Another related article on the advantages of conditional membership in an SMSF can be found here at: http://www.dbalawyers.com.au/smsf-deeds/the-advantages-of-conditional-membership-in-an-smsf/

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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 can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers hold SMSF CPD training at venues all around. 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.