How to remove evil and dead Trustees from your SMSF

Removing Trustees and Members from your SMSF

There are compelling reasons to share your Self-Managed Superannuation Fund (SMSF) with others, such as your spouse, children, in-laws, and business partners. Given that SMSFs can be costly to manage, distributing the operational expenses among up to six members reduces the cost for each member.

However, all members must act as trustees (or directors of the trustee). This is very intimate. It requires a harmonious relationship among everyone. Similarly, when the company is the trustee, all members must be directors. This close collaboration necessitates strong, cooperative relationships to ensure the smooth management of the SMSF.

Triway Superannuation Fund v ATO the drug-affected child steals everyone’s superannuation

In Triway Superannuation Fund v ATO [2011] AATA 302 the drug-affected child member stole all the Superannuation. The ATO successfully declared the fund non-complying. So all the members suffered the ATO penalties!

Facts of Triway Super v ATO

In the case, Triway Superannuation Fund v ATO, the Administrative Appeals Tribunal considered the misappropriation of funds by a trustee of an SMSF. This trustee, also a member and son of the other trustees, diverted almost all of the fund’s assets for personal use, driven by a drug addiction. This misuse led to the ATO declaring the fund non-complying, which resulted in significant tax liabilities for the SMSF.

What does Triway Super v ATO teach us

The Tribunal’s decision underscores the stringent regulatory expectations and high ethical standards required of SMSF trustees. It also illustrates the potential risks and liabilities that can arise from mismanagement, particularly in familial setups within SMSFs.

The case also discusses the notion that a corporate trustee structure might reduce such risks, providing a layer of protection against individual mismanagement by separating personal liability from the trustee role. This case serves as a critical reminder of the diligence required in managing SMSFs and the severe repercussions of failing to adhere to legal responsibilities​

Can I kick out a person from my SMSF?

You cannot, however, just kick out a member. This is unless they give their written consent.

Regulations 6.28 and 6.29 Superannuation Industry (Supervision) Regulations (Cth) state that a member’s benefit can only be rolled over to another fund with the member’s written consent. But generally, for Self-Managed Superannuation Funds, all the members have to act unanimously.

SMSF Trustees must act unanimously – together

Dawson v Dawson

Generally, the Trustees must act unanimously. What if the trustees cannot agree together? In Dawson v Dawson [1945] VLR 99 [sorry, but this link will take 3 or 4 minutes to show, it is an old case and links to the PDF on Austlii] O’Bryan J stated:

Trustees can only act if unanimous, and so no course of action can be decided upon or given effect to unless all then agree that it is desirable. Any attempt by a majority to carry on in defiance of the decision of their co-trustee can be followed by appropriate legal proceedings to ensure that only the unanimous decision be given effect

In Dawson v Dawson, the court emphasised that trustees must act unanimously in their decisions. This case illustrated the legal requirement for co-trustees to have joint control over trust property, highlighting it as a privilege and duty. This case reinforces the strict legal framework governing the operations of trusts, where unanimous agreement is crucial for the proper management and control of trust assets. It highlights the potential challenges and legal implications when trustees cannot reach an agreement, underlining the importance of careful trustee selection and clear guidelines in trust deeds.

Sky v Body

Joint trustees of a trust are generally regarded as a single entity in the operation of the trust. Justice Street in Sky v Body (1970) 92 WN (NSW) 934 confirmed this:

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.

The case of Sky v Body shows the necessity for trustees to operate in unison, as underscored by Justice Street. The judgement explains that trustees collectively share a unified, inseparable role, rather than having separate responsibilities. This principle is vital for ensuring that all trustees are aligned in their decision-making, reflecting the unified intent required in trust administration.

This case highlights the legal imperative for unanimity among trustees, marking it as essential for the proper governance and functioning of trusts. The requirement for unanimous decision-making is fundamental to maintaining the integrity and intended purpose of the trust, ensuring that all actions taken are agreed upon by all trustees. This doctrine is critical in contexts where trust decisions must navigate complex legal landscapes or potential internal conflicts.

If SMSF trustees cannot agree they can not act

Therefore, on first blush, if SMSF trustees cannot agree, they cannot act.

If you cannot get rid of the person you can apply to the court. But that is expensive. And you need a good argument. A member stealing money is a good argument.

You can update Trustees, Members and the SMSF Trust Deed all at the same time here.

You can see a full Sample here with our law firm’s Letter of Advice.

How to remove an SMSF member:

• update the SMSF deed, which contains minutes and the law firm’s covering letters
• update ASIC (if you have a company as trustee of the SMSF) and the ATO
• lodge change of superannuation entities details form with ATO and ABR
• calculate the exit member’s balance to the current date
• prepare a rollover statement for the exit member
• notify the SMSF trustee of the payout figure for the exit member

If you have any further questions please contact us. We are a law firm so we can give legal advice as you build the SMSF Deed update. However, start the free building process first, as it answers most questions.

Members fighting in SMSFs

Superannuation is money you lock away for your retirement. You can choose an industry, retail or self-managed fund. A third of Australian superannuation assets are in Self-Managed Superannuation Funds (SMSFs). If you have an SMSF, you keep control of your superannuation. But what happens when the SMSF members fight?

All SMSF members have to work together – it is the law

SMSFs are expensive to operate. Often Mum and Dad want to bring their children into the SMSF as members. Mum and Dad might even bring in their son or daughter-in-law. You can have up to six members in your SMSF. Irrespective of what your SMSF Trust Deed states, the law requires that all members agree on big decisions. This makes SMSFs intimate. Think about how hard it is to get Mum and Dad to agree on anything. Then add children and in-laws.

The alternative is a “single-member” fund. This has one member and a company as the trustee. The sole member is the sole director of the corporate trustee.

What should we invest in? How much should we invest? These are challenges for both business partners and families.

Disputes in SMSFs – when members fight

Because of this intimacy, SMSFs are hotbeds for disagreement. Members have vested interests, duties and responsibilities. Members may have different opinions about the SMSF’s investment strategy. They may lose confidence in each other. Once a dispute about an SMSF is underway, it is not simple to resolve. To compound the challenge of acting unanimously, members of an SMSF must also comply with complex superannuation and tax rules. One of my clients had this problem:

Daisy and Mum do not agree on everything.

Mum and Dad love their little princess, Daisy. She inspires Dad to start a doll factory. Mum and Dad’s SMSF owns Dad’s factory. It is the SMSF’s major asset. Daisy is also a member of the SMSF.

Daisy marries her long-term boyfriend Ben. Daisy’s father is particularly happy as ‘the young man does what he is told’. Dad wants Ben to join the SMSF to reduce costs.

From the excitement, Dad suffers from a fatal heart attack. Mum gets his Superannuation. In his memory, Mum wants to continue owning the factory. Ben wants to sell the factory. He laments:

1. ‘the factory is a bad investment’
2. ‘with bad tenants’
3. ‘with a lower than market rent’

Deadlock. Mum and Ben stop talking. Daisy is stuck in the middle. Even if she wanted to pick a side, the Trust Deed requires three signatures on all documents.

How to stop members fighting in an SMSF

For disputes in SMSFs, your best insurance policy is a well-drafted SMSF Trust Deed. This sets out the SMSF’s purpose and strategies to avoid problems. It describes the process of dealing with disputes quickly and inexpensively. See a Sample of our SMSF Trust Deed here.

Disgruntled members of SMSFs can’t force other members to act. Usually, members must reach a unanimous decision. Where the Trust Deed doesn’t specify the process to resolve a dispute, members choose the process. Many members try informal dispute resolution before going to Court.

To stop a dispute the SMSF member leaves

Sometimes, differences cannot be reconciled. Members leave the SMSF. By law, they must take their interest. But what if the SMSF assets are not easy to separate? What if the major asset is a doll factory? Members might have to sell the fund’s assets. They might even have to wind up the SMSF. Issues arise where the members cannot agree on the value of the assets.

Returning to my client’s problem:

Mum, Daisy and Ben cannot get over their differences. The SMSF Trust Deed says to undergo Conciliation. Mum also sees a grief counsellor. They agree to sell the factory. They can remember Dad in other ways.

Now, Ben and Mum disagree on the value of the factory. They seek independent valuation, agree on a middle ground and sell the factory. Ben and Daisy take their cash and start their own SMSF. There are Capital Gains Tax (CGT) and stamp duty problems. But Ben doesn’t care. He is happy to be rid of Dad’s shackles.

SMSF Trustee’s five duties – reduces conflict

Members of SMSFs have duties and responsibilities: s 52B SISA Superannuation Industry (Supervision) Act 1994 (Cth) (SISA).

These are to:

1. Act honestly
2. Exercise care, skill and diligence
3. Act in the beneficiary’s best interests
4. Keep the SMSF’s funds and member funds separate
5. Comply with the sole purpose test – hold the assets for retirement

All members manage and operate the SMSF. All members must follow the duties, responsibilities and sole purpose test. Therefore, members cannot blame bad decisions and lost money on anyone else. Accountants, lawyers and financial planners just provide advice. Every member is liable for their decisions and decisions made by other members.

Where a member breaches a duty, then the other members apply to the Court for an injunction: s 315 SISA.

The injunction restrains or requires performance. The Court may also award damages: s 55(3) SISA.

Breaching member duties – more SMSF fighting

Many years later, Daisy and Ben reach retirement age. Ben’s best friend and business partner John is a member of their SMSF. (They didn’t learn from previous experience.)

Ben wants to withdraw his share of the SMSF. This is to buy a permanent berth on the ‘Azure of the Ocean’. However, the SMSF assets are lumpy and large. The only cash in the bank is required to pay for maintenance of the SMSF’s property. To pay Ben, the members must sell this major asset. Daisy agrees. But John disagrees. He says the market is depressed. Selling the SMSF’s major asset incurs fees and taxes. He loses money. It is better to wait two years. But in two years, Ben could be dead. He wants his lump sum now.

 Unwilling to pass up a once-in-a-lifetime opportunity, Ben strips the bank account of the maintenance money. Ben and Daisy flee to the ship.

Getting rid of an SMSF member

Members of an SMSF might want to get rid of another member. This happens often when there are disputes in SMSFs. If they are convicted of a dishonest offence, it’s easy. The Australian Taxation Office (ATO) removes them. But what if they won’t leave? Or what if there is a disagreement about whether there is dishonest behaviour?

Worst still, the ATO may replace them with an “independent trustee”: s 133(1) SISA. This causes the SMSF to cease being an SMSF. It becomes a “small APRA fund”. This is the kiss of death. Independent trustees take control and sell all the assets.

John reports Ben to the ATO. Ben and Daisy cannot be found. John is liable for the SMSF’s non-compliance. The ATO appoint an independent trustee. The SMSF becomes an APRA fund. The independent trustee sells the properties to the market.

How to avoid member disputes in an SMSF

SMSFs give you control of your money. Your success means a comfortable retirement. You may have many reasons to invite more members to the SMSF, such as succession planning or cost. With many members involved, disputes in SMSFs can be unavoidable. Even in the best of families, parents and children do not always see eye to eye. Children grow up and form their relationships and families. Anticipate and plan for the possibility of disputes.

Ensure that your SMSF documents are clear. If you already have an SMSF Deed update it here. If unanimous decision-making is unlikely to succeed for you and your family or business partners, perhaps a single-member SMSF is more suitable for you.

Written by Adjunct Professor, UWA Law School, Dr Brett Davies and Maddie Mulholland, UWA LLB, BCom Student.