Trust the law – where your power as a trustee comes from

SMSF technical expert and columnist for The Australian newspaper
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As I mentioned last week, a trust, such as a super fund, isn’t a legal entity – the trustee is the legal entity. A trustee’s powers don’t arise as a matter of course (unlike natural persons or companies, which are given the powers of a natural person at law). Rather, the trustee’s powers may only be derived through several sources: the Courts; by legislation; and by the trust deed. If the trustee undertakes an action that isn’t permitted by one of those sources of power, the trustee is in breach of trust.

In reality, it’s impractical for a court to continually confer powers on a trustee.

Also, while the relevant State and Territory trustee legislation certainly confers powers on a trustee, many superannuation powers aren’t within their scope.

The SIS Act doesn’t give trustees extensive powers. These provisions are generally either prohibitive (i.e. you can’t do something, such as lending money to a fund member) or, they are permissive (i.e. allows you to do something but doesn’t actually authorise the action).

In reality, the predominant source of power for a trustee to act is the trust deed.

This is where the argument as to the effectiveness of catch-all provisions arises.

Some SMSF industry people will say that a trustee’s powers must be set out expressly and shouldn’t be implied from a catch-all provision because there’s no standard set of trustee’s powers. In other words, a trustee’s powers must be set out expressly in the deed.

Other SMSF industry people argue that a catch-all provision is sufficient – it’s a positive formulation of the trustee’s powers and that power doesn’t need to be expressed.

The problem with this argument is that even if we accept that a well drafted catch-all provision can give you sufficient power to act, it won’t set out the mechanics or parameters of using that power.

In many situations this is extremely important. Let’s take Binding Death Benefit Nominations as an example. The super laws don’t allow a member to make a BDBN and they don’t give a trustee any power to accept these nominations.

The SIS Act simply states that if the trust deed allows a third party (a member) to give directions to the trustee, the trustee won’t be in breach of its duty not to delegate its decision making responsibilities.

As discussed above, the powers that a trustee needs have to come from the trust deed.

Let’s assume your catch-all provision gives you the power to accept a binding nomination. That is all that the catch-all provision will do – give power to the trustee to accept the binding nomination. It doesn’t compel you to act in accordance with the nomination. The trustee could follow the nomination if it wanted to, but wouldn’t have to under the deed.

Another example is account-based pensions. The SIS laws say that if a benefit is cashed out, it can be paid as either a pension or lump sum. This means that the terms of a pension and its ability to provide for any estate planning objectives depend entirely on the terms of the trust deed.

You can’t get around this by simply saying that a fund can provide whatever benefits are permitted by the SIS laws. The SIS Act provides that the trustee can pay an account-based pension but the definition of account-based pensions in the SIS Regulations isn’t complete.  For example, the SIS regulations provide that a pension is only transferable on the death of the pensioner. This is no help in working out if a reversionary pensioner can be and has been nominated. Whether the pension is reversionary, and also the identity of that beneficiary, can only be determined by the terms of the pension.

What should you do if you’ve relied on an ineffective catch-all provision? This depends on the particular action undertaken.

If a member has given a “binding nomination” to the trustee on the basis of a catch-all provision, then the deed should be amended to expressly provide for binding nominations. The member should then make another nomination in accordance with the terms of the amended deed.

For other actions, perhaps the trust deed can be amended retrospectively and signed by the members to ratify the trustee action. It would really depend on the action that the trustee has taken and even then needs to be thought about on a case-by-case basis.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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