SMSF trustee disputes: The need for a resolution plan

Disagreements between the trustees of a self managed superannuation fund (SMSF) may not be a common occurrence, but it would be a safe bet to say they do crop up now and then.

SMSFs that use a corporate trustee may have mechanisms to deal with dispute resolution through the Corporations Act or guidance gleaned from the corporate trustee’s constitution. And it is important to remember that the Superannuation Complaints Tribunal has no jurisdiction over SMSFs, so there is no direct help there.

Individual SMSF trustees must sign a trustee declaration that requires them to adhere to certain duties. These duties include the following:

  • 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 the assets for the SMSF separate from others (such as your personal money and assets)
  • retain control over the fund
  • develop and implement an investment strategy
  • don’t enter into contracts or behave in a way that hinders you or other trustees from performing or exercising functions or powers
  • allow access to information for all members
  • don’t allow early access to the SMSF funds.

However, personal interpretation of adherence to these duties can still allow for disputes to arise.

One over-riding expectation for every SMSF is to fulfil the “sole purpose test” – the sole purpose being that the fund is established to provide benefits to each member at retirement, at age 65, or to a member’s dependants upon the member’s death. But as there are various means to achieve a common goal, disagreements between trustees are not inconceivable.

Disputes can arise over a myriad of matters. Investments, for example (what to invest in, and how much), can be a hotbed of discussion – notwithstanding that the fund’s written investment strategy will spell out matters such as diversification and asset allocation, trustees can have differing opinions about how best to satisfy these stated strategies.

Another area where contention can occur is if the SMSF considers admitting new members. One trustee may be keen to bring in, say, a business partner or another family member that other trustees have no wish to be financially involved with.

As with many facets of SMSF administration and management, the trust deed can be looked to for guidance. Indeed, in setting up an SMSF, or in re-drafting a deed, SMSF owners could consider some dispute resolution measures or guidelines to be inserted into the trust deed.

Some guidance from an SMSF professional could be prudent, however the following provisions have been used with other SMSFs, although the success or otherwise of these measures will very much depend on the individuals involved.

A variety of provisions can be considered (and of course will be moot should the fund have only one member), but they can include:

  • trustee decisions can be carried if a simple majority of trustees agree
  • decisions can only be actioned if a unanimous vote by all trustees is made
  • a notice of a trustee meeting must be made in writing with a minimum notice period
  • if a trustee cannot attend a meeting they do not get a vote on decisions dealt with at that meeting
  • voting can be allowed by proxy, or by telephone or electronically (email)
  • some funds may only allow decisions to be made if all trustees are physically present at a meeting
  • others may require a quorum of, say, 50% of trustees before a meeting can proceed
  • if decisions can’t be reached due to a deadlocked disagreement, one trustee can ask for voting to be conducted on the basis of votes being assigned a value corresponding to the value of the assets held by each trustee in the fund.

The last option is known sometimes as “proportional voting”, and has been used at times to allay just such problems as trustee voting deadlocks. “Valuing” votes in such a way can be considered where an equal vote method causes practical difficulties.

The ATO however has questioned the appropriateness of giving a greater say to trustees with bigger balances, even though estimates put about 40% of SMSFs including such a clause in their deeds. The practice has even been accused of skating on legal thin ice, so some legal professional advice may be appropriate.

Experts have also have expressed reservations about proportional voting, including the fact that it creates a perception of one trustee having control over a fund, where the ultimate goal of any SMSF is to provide for the best interests of all members.

Another reservation is that “minority” trustees (when under the law there is no such thing) may acquire an impression that they have less responsibility for the running of the fund because they believe they have less “power”. Also, any coercion by a “dominant” trustee may not go down so well if there are multiple signatories required on cheques, or sale or purchase contracts for assets (likewise a danger if only one signatory is allowed according to the operating rules in the deed).

But whatever the arrangements or allowances made within each SMSF, consideration about dispute resolution could be worthwhile for every fund – just in case.

 

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