{"id":5237,"date":"2014-08-05T00:00:22","date_gmt":"2014-08-04T14:00:22","guid":{"rendered":"http:\/\/www.dbalawyers.com.au\/?p=5237"},"modified":"2014-09-09T12:32:53","modified_gmt":"2014-09-09T02:32:53","slug":"trustees-act","status":"publish","type":"post","link":"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/trustees-act\/","title":{"rendered":"How trustees should act"},"content":{"rendered":"<div><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/www.dbalawyers.com.au\/wp-content\/uploads\/2014\/08\/How-trustees-should-act.jpg\" alt=\"How-trustees-should-act\" width=\"300\" height=\"199\" class=\"alignright size-full wp-image-5240\" \/><\/div>\n<h3>Introduction<\/h3>\n<p>There is a special type of relationship called a fiduciary relationship. Trustees of SMSFs are in a fiduciary relationship in respect of the beneficiaries of the SMSF.<\/p>\n<p>The most recently available ATO statistics state that there are 1,006,975 members of SMSFs, so presumably there are a similar number of SMSF trustees (or directors of trustees). Of these 1 million people, more or less, how many understand the implications of the fact that they are in such a relationship? No doubt some do, but many might not.<\/p>\n<p>This article seeks to provide some insights as to what it means to be in a fiduciary relationship and therefore how SMSF trustees should act.<\/p>\n<h3>Nature of a fiduciary relationship<\/h3>\n<p>Due to the nature of a fiduciary relationship, SMSF trustees are under the highest of duties to act in the best interests of the SMSF\u2019s beneficiaries. The duty is much higher than that of a contractual relationship.<\/p>\n<p>The basic fiduciary obligations that trustees of SMSFs are under are to:<\/p>\n<ul>\n<li>not place themselves in a situation of conflict between their self-interest and the duty to the beneficiaries; and<\/li>\n<li>not to profit from their position as trustees.<\/li>\n<\/ul>\n<h3>Who are the beneficiaries of an SMSF?<\/h3>\n<p>SMSF trustees owe duties to the beneficiaries of their SMSF. On its face, this causes many to relax because they assume that the beneficiaries of an SMSF are the same as the members of the SMSF and therefore typically the same as the trustees. In other words, many assume that the trustees only owe fiduciary duties to themselves.<\/p>\n<p>However, this is not accurate.<\/p>\n<p>A number of cases over recent years have made it clear that the beneficiaries of an SMSF are much broader than just the members (see <em>Kafataris v Deputy Commissioner of Taxation<\/em> (2008) 172 FCR 242 and <em>Cobden Lime Pty Ltd v Commissioner for State Revenue<\/em> [2010] VCAT 1278)). At the risk of overall simplifying, the beneficiaries of an SMSF are everyone who <em>might<\/em> one day benefit from an SMSF (it does not matter if ultimately they never actually do benefit).<\/p>\n<p>For example, in the <em>Kafataris<\/em> decision, an SMSF had one member. That member had a husband, five children and 15 grandchildren. Upon the member\u2019s death, SMSF benefits could be paid to the husband, the children and (if they were dependent upon the member) the grandchildren. Accordingly, the judge considered all of these people to be beneficiaries and presumably there could be many more beneficiaries.<\/p>\n<p>In short, by becoming the trustee of an SMSF these duties are owed to a wide class of people.<\/p>\n<h3>Practical implications<\/h3>\n<p>A practical implication of SMSF trustees being a fiduciary relationship is that the <em>default<\/em> position is as follows:<\/p>\n<ul>\n<li>SMSF trustees should not enter into any related party dealings. This is the case even if the dealing is to the financial gain of the beneficiaries (<em>Boardman v Phipps<\/em> [1967] 2 AC 46). Further, this is the case even if the dealings are at arm\u2019s length terms and involve, say, business real property.<\/li>\n<li>SMSF trustees should not run businesses (<em>Kirkman v Booth<\/em> (1848) 11 Beav 273). This is despite recent developments where the ATO acknowledged that at times it can be possible for an SMSF trustee to do this.<\/li>\n<li>SMSF trustees should not be remunerated (<em>Robinson v Pett<\/em> (1734) 3 PWms 249). This is despite recent legislative developments that provide that in certain limited circumstances if an SMSF trustee is remunerated the fund will not fail to meet the definition of an SMSF (see s 17B of the <em>Superannuation Industry (Supervision) Act 1993<\/em> (Cth)).<\/li>\n<li>SMSF trustees should not allow members to make a binding death benefit nomination, as it involves the trustee delegating its decision making power to someone else (<em>McMillian v McMillian<\/em> (1891) 17 VLR 33).<\/li>\n<\/ul>\n<p>Naturally, all of the above do occur. Indeed, some of the above are very common occurrences (eg, making a binding death benefit nomination).<\/p>\n<p>The reason why they can occur without breaching fiduciary duties is that trust deed can override the default position (see, for example, <em>Dagenmont Pty Ltd v Lugton<\/em> [2007] QSC 272).<\/p>\n<p>However, it must be remembered that not all trust deeds are the same. Not all override the default position set out above. For example, few allow for remuneration or running a business.<\/p>\n<h3>Is there any duty that a deed can\u2019t exclude?<\/h3>\n<p>There is a limit to the duties that a deed can exclude. In the case of <em>Armitage v Nurse<\/em> [1998] Ch 241 it was accepted that there is \u2018an irreducible core of obligations owed by the trustees to the beneficiaries\u2019 That core is \u2018[t]he duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries\u2019.<\/p>\n<p>Further to this are the covenants imposed by the <em>Superannuation Industry (Supervision) Act 1993<\/em> (Cth). These covenants expand the irreducible core, including items like obligations:<\/p>\n<div class=\"indent-text\">(a)\tto act honestly in all matters concerning the fund;<br \/>\n(b)\tto exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;<br \/>\n(c)\tto perform the trustee\u2019s duties and exercise the trustee\u2019s powers in the best interests of the beneficiaries; <\/div>\n<h3>When is this most important?<\/h3>\n<p>These duties are typically most important upon the death of a member. Trustees must remember to act honestly and in good faith for the benefit of the <em>beneficiaries<\/em> (ie, a very wide class of people indeed).<\/p>\n<p>If they don\u2019t, it could result in the trustee being personally liable and not being eligible to be indemnified for their costs from SMSF assets. In extreme examples, this can even result in directors of corporate trustees being personally liable.<\/p>\n<p>Recent case law confirms that \u2014 unless the deed so provides \u2014 trustees do not need to give reasons (<em>Mandie v Memart Nominees Pty Ltd<\/em> [2014] VSC 290). However, if trustees do give reasons, those reasons could be scrutinised. This is often particularly relevant where there is no binding death benefit nomination and SMSF trustees are determining who to pay death benefits to.<\/p>\n<p class=\"aligncenter\">* * *<\/p>\n<p>This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.<\/p>\n<p>Note: DBA Lawyers hold SMSF CPD training at venues all around Australia and online. For more details or to register, visit <a href=\"http:\/\/www.dbanetwork.com.au\" target=\"_blank\">www.dbanetwork.com.au<\/a> or call Marie on 03 9092 9400.<\/p>\n<div class=\"printfriendly pf-button  pf-alignleft\"><a href=\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/trustees-act\/?pfstyle=wp\" rel=\"nofollow\"  title=\"Printer Friendly, PDF & Email\"><img decoding=\"async\" class=\"pf-button-img\" src=\"https:\/\/cdn.printfriendly.com\/buttons\/printfriendly-pdf-button.png\" alt=\"Print Friendly, PDF & Email\" style=\"width: 112px;height: 24px;\"  \/><\/a><\/div>\n","protected":false},"excerpt":{"rendered":"<p>There is a special type of relationship called a fiduciary relationship. Trustees of SMSFs are in a fiduciary relationship in respect of the beneficiaries of the SMSF. The most recently available ATO statistics state that there are 1,006,975 members of SMSFs, so presumably there are a similar number of SMSF trustees (or directors of [<a class=\"read-more\" href=\"https:\/\/www.dbalawyers.com.au\/smsf-compliance\/trustees-act\/\">read more<\/a>]<\/p>\n","protected":false},"author":11,"featured_media":5240,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[33,37,38],"tags":[],"ppma_author":[136],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How trustees should act | Leading SMSF Law Firm<\/title>\n<meta name=\"description\" content=\"There is a special type of relationship called a fiduciary relationship. Trustees of SMSFs are in a fiduciary relationship in respect of the beneficiaries of the SMSF. 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He has worked predominantly in the fields of tax and superannuation over the past 17 years and holds a Master of Laws from the University of Melbourne. Bryce is a regular seminar presenter on tax and SMSF topics and has published extensively in these areas. Bryce regularly presents for the major professional bodies including the SMSF Association, CPA Australia The Tax Institute, Chartered Accountants Australia and New Zealand and DBA Network. Bryce is regularly quoted and published in the Australian Financial Review, the Herald Sun, CCH and LexisNexis publications, and elsewhere in the financial press. Bryce wrote the book Complete Guide to SMSFs: Planning for Loss of Capacity and Death, published by CCH Wolters Kluwer. Bryce is on the editorial panel of LexisNexis' Australian Superannuation Law Bulletin. He is a Senior Fellow at the University of Melbourne's Law School, where he is the subject coordinator of Taxation of Superannuation. 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Bryce regularly presents for the major professional bodies including the SMSF Association, CPA Australia The Tax Institute, Chartered Accountants Australia and New Zealand and DBA Network.\r\nBryce is regularly quoted and published in the Australian Financial Review, the Herald Sun, CCH and LexisNexis publications, and elsewhere in the financial press. Bryce wrote the book Complete Guide to SMSFs: Planning for Loss of Capacity and Death, published by CCH Wolters Kluwer. Bryce is on the editorial panel of LexisNexis' Australian Superannuation Law Bulletin. He is a Senior Fellow at the University of Melbourne's Law School, where he is the subject coordinator of Taxation of Superannuation.\r\nBryce is a Specialist SMSF Advisor\u2122 as well as being a Chartered Tax Adviser."}],"_links":{"self":[{"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/posts\/5237"}],"collection":[{"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/comments?post=5237"}],"version-history":[{"count":0,"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/posts\/5237\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/media\/5240"}],"wp:attachment":[{"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/media?parent=5237"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/categories?post=5237"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/tags?post=5237"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.dbalawyers.com.au\/wp-json\/wp\/v2\/ppma_author?post=5237"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}