Examination of Ioppolo & Heresford v Conti [2013] WASC 389 and Wooster v Morris [2013] VSC 594

In the event of death, superannuation death benefits (death benefits) do not automatically form part of an individual’s estate. The terms of the superannuation trust deed will determine whether the superannuation trustee has the discretion to pay death benefits to a dependant, as defined by the Superannuation Industry (Supervision) Act 1993 (SIS Act), or to the legal personal representative.

Self-managed superannuation funds (SMSFs) are becoming increasing common and an important investment vehicle for individuals to save for their retirement. Latest figures from the Australian Taxation Office estimate that at 31 December 2013 a total of 508,330 SMSFs were in existence with 966,181 individuals being members of SMSFs. That same report estimates the total net value of assets invested in SMSFs amounts to approximately $532m and for the financial year ending 30 June 2012, the average assets per member in a SMSF was estimated to have accumulated $486,602.

Given the individual wealth being held in this manner it is important to consider SMSFs carefully when considering an individual’s estate plan and in particular the preparation and use of binding death benefit nominations. To date, disputes arising from SMSFs and binding death benefit nominations prepared by member of SMSFs are rare. However, given the number of established SMSFs now in Australia, the value of funds now being invested and that SMSFs generally involve family groups, disputes are likely to become more common.

The Supreme Courts of Western Australia and Victoria have recently considered matters in which disputes have arisen over the payment of death benefits from a SMSF. The strict approach taken by the Courts to date only further highlights the importance of obtaining appropriate advice.

Ioppolo & Heresford v Conti [2013] WASC 389

In the case of Ioppolo & Heresford v Conti [2013] WASC 389 the deceased, Mrs Conti was a member and joint trustee of a SMSF with her husband, Augusto Conti. Mrs Conti died on 5 August 2010 having executed a Will dated 13 January 2005. Following Mrs Conti’s death, Mr Conti remained the sole trustee of the fund until 4 February 2011 when by a deed of appointment Augusto Investments Pty Ltd was appointed the sole trustee of the SMSF of which Mr Conti was the director.

The SMSF trust deed provided that in the absence of a binding written direction of a member, the trustee had the discretion to make payment of the death benefit to a spouse, child or any other individual who in the trustee’s opinion was dependent on the deceased.

Mrs Conti had not prepared a binding written direction as to the payment of her death benefit which had effect at the date of her death. Rather, Mrs Conti in her Will expressed a desire that her death benefits from the SMSF be paid to her children and specifically stated that her husband was not to receive any benefit. However, Mrs Conti had prepared two binding nominations during her lifetime dated 29 July 2002 and 10 April 2006. Both directed the trustee of the SMSF to pay her death benefits to Mr Conti however, the second binding nomination lapsed on the third anniversary of it being executed and therefore was not of any effect at the date of her death.

Mr Conti then caused Augusto Investments Pty Ltd as trustee of the SMSF to determine that Mrs Conti’s death benefit should be paid to Mr Conti and not to the children mentioned in the Will.

The children of Mrs Conti, who were also the executors of her Will brought this matter before the Court to consider the following issues:

  • Was there an obligation for Mr Conti to appoint one of the executors of Mrs Conti’s Will as a trustee of the SMSF?
  • The children argued that the SMSF trust deed required the fund to remain a SMSF and accordingly this could only be achieved by reference to sections 17A and 17A(1)(d)(i) of the SIS Act which required an executor to be appointed as a trustee.
  • The Court rejected that argument. While section 17A(3) of the SIS Act  allows  for  the  appointment of an executor as a trustee of a SMSF it does not require such an appointment. In the case of a qualifying SMSF with two members and trustees, on the death of one of the members it remains a SMSF for a period of six months. If the remaining member has not taken steps during that six month period to bring the fund back within the terms of a qualifying fund under s 17A(2) of the SIS Act then it will then cease to be a SMSF.

Mr Conti had, in this case appointed Augusto Investments Pty Ltd as a corporate trustee within six months of Mrs Conti’s death and therefore the SMSF remained a qualifying SMSF.

  • By resolving to pay the death benefit to Mr Conti, did Augusto Investments Pty Ltd as the trustee, do so in a bona fide manner as required by the terms of the SMSF deed?

Mrs Conti’s children argued that as the trustee did not comply with the direction in the Mrs Conti’s Will to pay the death benefit to her children, Mr Conti had not acted in a bona fide manner.

The Court found there was no evidence to support this argument. Mr Conti had sought specialist advice prior to exercising the trustee’s discretion and was entitled to ignore the direction in the Will.

  • Could the one of the executors be appointed as trustees of the SMSF pursuant to section 77 of the Trustee Act 1962 (WA)?

The Court found there was no good reason to appoint additional trustees of the SMSF as the existing trustee was acting in a bona fide manner and the appointment of an additional trustee would inevitably result in further dispute.

  • Can the discretion exercised by the trustee be reviewed?

The Court held that there were no grounds to justify a review of the trustee’s decision in this case as it acted upon advice, in a bona fide manner and in accordance with the terms of the SMSF.

Overall, the Court determined that despite the direction in the Mrs Conti’s Will the trustee did act appropriately and was therefore entitled to distribute the death benefits in his discretion.

If Mrs Conti had prepared and executed a valid binding nomination at the time of the execution of her Will in favour of her children, the trustee would have been bound to pay the death benefits in that manner and a dispute would have been avoided.

Wooster v Morris [2013] VSC 594

The Supreme Court of Victoria was asked to consider a different set of facts in the matter of Wooster v Morris [2013] VSC 594. In that case the Court considered the validity of a binding nomination prepared in respect of a SMSF that allegedly failed to comply with the terms of the SMSF deed and whether the trustee of the SMSF was entitled to an indemnity with respect to costs.

Mr Morris executed a binding nomination two years before he died in favour of his daughters of his first marriage who were to receive all of his interest in the SMSF. Upon the death of Mr Morris his second wife was the surviving member and trustee of the SMSF. She subsequently appointed her son as a co-trustee and then a corporate trustee, Upper Swan Nominees Pty Ltd who were all parties to the proceedings.

The SMSF trust deed required that a valid, binding nomination must be delivered to the trustee. It can only be assumed from the judgement that Mrs Morris alleged that the binding nomination was never served on her and therefore was invalid. Mrs Morris and her son exercised the trustee’s discretion and resolved to and subsequently paid the entire death benefit to Mrs Morris by transferring the balance to her own SMSF account.

The daughters, who were also the executors of Mr Morris’ Will, commenced legal proceedings seeking a declaration that the binding nomination was in fact valid and if so, the amount of the death benefit that should be paid to them. The parties agreed that the issue be referred to a Special Referee for determination. The Special Referee determined that the binding nomination was both valid and binding. Consequently, the daughters should be paid all of Mr Morris’s death benefits in addition to interest. A dispute subsequently arose as to the amount of the death benefit as the financial statements of the SMSF had been amended after the legal proceedings were instituted which the Special Referee found were inaccurate and in favour of Mrs Morris. The Court accepted the Special Referee’s findings and adopted the report as binding on all parties.

The daughters of Mr Morris sought costs against both the corporate trustee and Mrs Morris personally. Mrs Morris sought to hide behind the corporate trustee. The Court found that as Mrs Morris was a trustee at the time the decision was made to pay the death benefits to herself and that she was also the controlling director of the unsuccessful corporate trustee, she had failed to take account of the best interests of the nominated beneficiaries, in this case the daughters.

The funds available to satisfy the payment to Mr Morris’ daughters also came into dispute. The daughters argued that the entire proceeds of the SMSF, including those in the account of Mrs Morris should be available and not just the balance of Mr Morris’ account at his date of death. That argument was opposed by Mrs Morris. Mrs Morris and the corporate trustee also sought an indemnity from the SMSF for payment of their own costs.

The Court held that all moneys in the SMSF were available to meet the payment to the daughters including interest and their costs. Due to Mrs Morris’ conduct in paying the death benefits in her favour she had not acted impartially in the administration of the trust and therefore, had breached her obligations by putting her own interests ahead of the other beneficiaries. Consequently, she was denied a right to indemnity from the SMSF and liable to pay her own costs of defending the proceedings.