A recent case in the NSW Supreme Court reminds trustees of self-managed superannuation funds of their duties. In Basil Notaras v Brinos Notaras^[1], the Court found that Brinos' failure to participate in his fund's administration and management, together with his misuse of those powers he did exercise, justified his removal as trustee.

The Facts

The Notaras brothers, Basil and Brinos, were the only two trustees and members of their self-managed superannuation fund. Following a breakdown in their relationship, Brinos used his powers as trustee to sell shares held by the fund and, in the name of the brothers as trustees of the fund, made withdrawals from the fund's bank accounts that exceeded his entitlement.

After completing the withdrawals, Brinos refused to take part in the management of the fund by failing to sign documents that were required to be lodged with the ATO.

You can read the full case here.

The Court's Decision

In the Court proceedings, Justice Rein exercised the Court's discretionary power to remove Brinos as trustee of the fund on the basis that:

• his decisions to sell the shares and withdraw funds were made without consulting Basil. This breached his duties to the fund because Brinos:
  • breached the fund's governing rules by exercising the powers of the trustee without the consent of his co-trustee; and
  • did not act in the best interests of all the fund's beneficiaries.
• his refusal to engage in the fund's management meant the fund failed to comply with its obligations under the Superannuation Industry (Supervision) Act 1993 (SIS Act). This breached his duties to the fund because Brinos had not acted honestly or with the required degree of care, skill and diligence required of fund trustees.
• his withdrawals from the fund's bank accounts exceeded his entitlement, leaving Brinos with no real interest in the fund.

As a result of these breaches, the Court concluded that Brinos could be removed and replaced as trustee under section 70 of the Trustee Act 1925 (NSW).

Duties of Fund Trustees

Under the SIS Act, fund trustees must fulfil a range of duties when managing and administering the fund. These include duties to:

• act honestly in all matters concerning the fund;
• act in the best interests of all the fund's members; and
• ensure that members can only access retirement benefits if they meet a legitimate condition of release.

In addition to these statutory duties, the common law imposes numerous additional obligations on trustees. These include duties to:

• obey the terms of the trust;
• account to beneficiaries; and
• avoid conflicts between:
  • the trustee's own interest and the trustee's duty to the trust; and
  • the trustee's duty to the trust and the trustee's duty to another person.

Removal of trustees generally

In New South Wales, the Trustees Act 1925 provides the Supreme Court with the discretion to remove a trustee from their position. In the Notaras case, Justice Rein found that a Court should only exercise this power where it was appropriate to do so considering all the circumstances. The Court must consider whether the removal of a trustee:

• is in the beneficiaries' best interests;
• would help ensure the security of the trust property; and
• would help ensure the efficient and satisfactory execution of the trust, and a faithful and sound exercise of the remaining trustee's powers.

Similar legislative provisions govern the actions of trustees in other states. However, as the Notaras case was decided in NSW, it may inform, but is not binding on, the decisions of Courts in other jurisdictions.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Superannuation team.

More Cleardocs information on related topics

You can read articles on a wide range of SMSF topics, here.

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[1] [2012] NSWSC 947.