The importance or proper process

Every superannuation fund must have a provision that deals with the allocation of the super interest on the death of a member. This arises from the Superannuation Industry (Supervision) (SIS) Act provision that death is a mandatory cashing event. The allocation provision could be to the effect that the superannuation interest of a deceased member is allocated to the legal personal representative of the member. However, most allocation provisions confer a discretion upon the trustees as to the allocation of the superannuation interest: the discretion is to select one or more beneficiaries to receive the allocation and the proportions each receives.

Strictly, the discretion is a power of selection as the trustees have a duty to cash out the superannuation interest. The SIS Act provides the outer boundaries of the allocation power and the trust deed of a particular fund may, but need not, impose more restrictive boundaries. However, the boundaries imposed by the trust deed must be entirely within the boundaries set by the SIS Act. Essentially, the legal boundaries are that the allocation can only be made to or among the legal personal representative, the spouse and the children of the member and individuals who, at the date of death of the member, were either financially dependent on or who had an interdependent relationship with the deceased member. The trust deed of the superannuation fund could restrict the potential beneficiaries to the legal personal representative or to the spouse.

The typical power of selection can have three elements: the selection of one or more beneficiaries for the allocation; if two or more beneficiaries are selected, then the proportions are to be allocated to each beneficiary; finally, if a selected beneficiary can receive the allocation as an income stream whether the allocation should be made as a lump sum or income stream, or a combination of both. Only the first two elements are presently relevant.

Why confer a discretion on the trustee as to the allocation of the superannuation interest of the deceased member? Most likely this practice arose from the time when death and succession duties were in force. Conferring a discretion on the trustee as to the allocation meant the superannuation interest could not be treated as forming part of the dutiable estate of the deceased member and therefore no death/succession duties would arise on the super balance. It seems the SIS Act simply accepted this prior practice.

When reviewing an allocation decision, the court is not concerned with either a merits review, that is, whether the decision was the best possible decision, or even whether the decision is unreasonable or unfair. The review is concerned with whether the Continued on next page

Continued from previous page decision is defective from a legal standpoint.

In reviewing whether an allocation is legally defective, the commonly applied rules are:

• whether the decision is one the trustee is authorised to make,

• whether a decision has actually been made by the trustee,

• whether the decision has been made in good faith,

• whether the decision has been made for a proper purpose, and

• whether the decision has been made with adequate deliberation (sometimes described as whether the trustee has given real and genuine consideration).

The focus of this article is on the last rule, the adequate deliberation rule, as a recent decision of the Victorian Court of Appeal in the Owies Family Trust Case [2022] VSCA 142 considered this rule in some depth, albeit in the context of a family discretionary trust. However, the other rules will be briefly discussed.

Authorised decision – a decision will not be authorised if the trustee does not have the legal power to make the decision. For instance, if the trustee has the power to select one or more or all of person A, person B or person C as the recipient of the superannuation interest of a deceased member, but is not authorised to select person D, the decision would be defective and invalid if the trustee did select person D.

Actual decision – if the trustee simply adopts someone else’s decision or makes a decision as directed by a third party, meaning the decision is not in fact the trustee’s own decision, then the decision will be defective.

Good faith – this rule is not about honesty, as the trustee must in any event act honestly, it is concerned with the trustee having an unbiased mind when making the allocation decision or making the decision in a disinterested manner, having a willingness to be engaged with and consider the relevant information.

Proper purpose – this rule requires the trustee to make a decision that is consistent with and furthers the purpose for which the allocation power was granted.

Adequate deliberation – this rule involves the trustee having the information relevant to the exercise of the power and not having regard to irrelevant information.

The trustee decision-making process as to the allocation of superannuation interests can be considered as having three components: the inputs, the black box and the outcome.

The first is the information the trustee has in making its allocation decision. The second is the actual process, thoughts, deliberations, assessment of factors and weighing of factors in the trustee reaching its decision. The third is the allocation decision of the trustee. The first and third components are visible to the court, while the second is invisible to the court, unless either the trustee is required to disclose its reasons or the trustee has disclosed its reasons.

Unless the court is entitled to open the black box, it is restricted to reviewing the inputs and the outcome in applying the various rules to determine whether the decision is legally defective.

Owies Family Trust Case

The parents established a family discretionary trust. The parents were directors of the corporate trustee and the father was also the appointor and guardian of the trust. The three children of the parents were expressly identified as the primary beneficiaries. The parents were also beneficiaries as the parents of the primary beneficiaries. Over a number of financial years, the distributable income of the trust was allocated in the proportions of 80 per cent to the parents in equal proportions and 20 per cent to one of the primary beneficiaries, although in one year it was allocated 100 per cent to the father. The other two primary beneficiaries received no allocations of distributable income. The dissatisfied and excluded primary beneficiaries challenged the allocations on the basis that the trustee had failed to properly exercise its discretion as to the allocation of the distributable income. This challenge was upheld on appeal to the Victorian Court of Appeal.

The relevance of the case is the court’s analysis of the requirement for adequate deliberation referred to in the case as “real and genuine consideration”. For relevant purposes the issue on appeal was whether there was adequate deliberation by the trustee. The court held, among other things, there was inadequate deliberation as the trustee did not have sufficient information as to the circumstances and needs of two of the three children. The trustee did not seek information about the excluded beneficiaries and any information they had was obtained informally, sporadically and was by no means complete and often from indirect sources.

Additionally, the income distributions were defective on the basis the trustee did not make the decisions in good faith as the allocations were made to the parents who were very well off and had no need for the income distributions (in fact most of the distributions were loaned back to the trust),

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Continued from previous page when one of the excluded beneficiaries was in continuing poor health, had consequently much reduced earning capacity and lived a very modest and frugal life.

The implication for all superannuation fund trustees is that when exercising the power of selection the trustee must obtain relevant information about each individual and obtain that information in an organised manner. Further, the allocation decision must be correctly worded to ensure that the resolution on its face demonstrates compliance with the five listed rules without disclosing the internal decision-making of the trustee.

While a checklist (see below) is not a substitute for a decision, it is an excellent aid to making a properly informed and legally effective decision that will assist in making the allocation decision less open to legal challenge.

The following is a recommended checklist:

Identification of the allocation provision

• Upon whom is the allocation power conferred?

• Is consent of a third party required?

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• Has any precondition for the exercise of the allocation power been satisfied (for example, no binding nomination made by the member)?

• Is the discretion to select beneficiaries or select both beneficiaries and quantum of benefit? This could be summarised in a short advice to the trustees that is tabled at the meeting.

Nature of the allocation power

• Who are the objects of the allocation power?

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• All objects should be identified. This could be included in the short advice prepared for the trustee.

Purpose of the allocation power

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• Providing financial support to the dependants currently being supported by the deceased at date of death.

• Secondary purpose – if no dependants financially supported by the deceased member at time of death for general support of dependants of the deceased.

Obtaining relevant information

• How to obtain?

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• Currency of information

• Completeness of information

• Inconsistency of information

This assists in establishing that the decision made by the trustee is an authorised decision.

This assists in establishing that the decision made by the trustee is an authorised decision.

Identifying the purpose also assists in determining what information is relevant and what information is irrelevant.

While large funds where the trustee is unrelated to the beneficiaries an application form/questionnaire is usually requested to be completed by each beneficiary.

In the context of SMSFs, this formality need not be used if the number of beneficiaries is small and relevant details are known to the trustees/directors.

5 Internal trustee deliberation – no details should be recorded in the resolution. Ideally, the decision should be made at meeting of the trustees or directors rather than as a written resolution.

Minute/resolution of decision

• State relevant details of allocation rule

• List each beneficiary – whether list complete or have undertaken sufficient investigations to identify objects

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• Note information obtaining process

• Note proper purpose

• Note particular difficulties (if any in obtaining information and how resolved)