What Wareham v Marsella REALLY means for SMSFs


Published November 2020

One of this year’s most important cases illustrates how a trustee should not behave when exercising a discretion to pay superannuation death benefits.

The Supreme Court of Victoria case, Wareham v Marsella [2020] VSCA 92, showed how a possible recipient of a death benefit can successfully challenge the “absolute and unfettered” discretion given to a SMSF trustee about how the benefit is paid.

By Bryce Figot, DBA Lawyers

It is typically best practice to write to all potential recipients inviting them to provide relevant information to the trustee before the trustee makes any decisions.

FACTS

In 1981, Mr and Mrs Swanson were a married couple and had two teenage children when Mr Swanson died in a motor vehicle accident. In 1984 Mrs Swanson married Mr Marsella. In 2003, Mrs Swanson commenced a self-managed superannuation fund and was the sole member. The fund’s trustees were herself and a daughter, Mrs Wareham, from her prior marriage. This structure continued until Mrs Swanson’s death on 27 April 2016. Upon Mrs Swanson’s death, the death benefit payable from the fund was $450,416. Mrs Swanson did not leave a binding death benefit nomination upon death. She did leave a will appointing her second husband (ie, Mr Marsella) as executor.
Under the terms of the SMSF’s deed, the trustee had an absolute and unfettered discretion as to how to pay the superannuation death benefits. The possible recipients included Mrs Swanson’s:
  • spouse (ie, Mr Marsella in his personal capacity)
  • children (including Mrs Wareham) and
  • legal personal representative (ie, Mr Marsella in his capacity as Mrs Swanson’s executor).
The above is a very common position and I would expect almost all SMSF deeds to provide this where there is no valid binding death benefit nomination upon death.
Under the specific terms of the SMSF’s deed, Mrs Wareham was, upon her mother’s death, left running the SMSF. (I stress that this position — ie, that Mrs Wareham was running the SMSF by virtue of being the sole surviving trustee — is by no means a certainty. There are plenty of SMSF deeds out there that have other provisions.)
On 17 April 2017, Mrs Wareham, as a trustee of the fund, resolved to pay all of the superannuation death benefits to herself personally.
Shortly afterwards, Mrs Wareham’s solicitor wrote to Mr Marsella’s solicitor and stated:
Your client [ie, Mr Marsella] is neither a Member, Trustee or Beneficiary of the Fund, and as such our client [ie, the trustee of the fund] is not required to consult with him on any matter relating to the administration of the Fund ...

A week later, Mrs Wareham’s solicitor wrote another letter to Mr Marsella’s solicitor stating:
... You refer to a conflict of interest but we fail to see how that allegedly arises. The Trustee is permitted to exercise her discretion, to any eligible object, which includes herself. Our client owes no duty to the estate or other beneficiaries ...

Mr Marsella brought an action in the Supreme Court of Victoria. Mr Marsella claimed that:
  • Mrs Wareham (ie, the trustee) exercised its discretion without real and genuine consideration to the interests of the dependants of the fund
  • the exercise of the trustee’s discretion should be set aside, and
  • a different trustee should be appointed.
Mr Marsella was successful in all three of his claims in the Supreme Court.
Mrs Wareham appealed to the Court of Appeal. Her appeal failed entirely

BEST PRACTICE

On first blush, it might seem odd that an absolute and unfettered discretion can be challenged in court. However, it is a longstanding principle that a court will interfere with the exercise of a trustee’s discretion if:
  • the trustee gave reasons and those reasons are not sound
  • the trustee failed to act honestly and in good faith
  • the trustee failed to act upon a genuine consideration, or
  • the trustee failed to exercise the power with due consideration for its proper purpose.
Similarly, if a trustee’s decision is one that no reasonable trustee could make on the material that was before it, a court can infer that the decision breaches one of the above principles.
Many trustees choose not to give reasons. In fact, this occurred in Wareham v Marsella where Mrs Wareham’s solicitor wrote to Mr Marsella’s solicitor: “You will know that a discretionary trustee is not required to give reasons for any decision and our client does not do so. However, extreme caution should be exercised in this regard: “…if a plaintiff puts forward a prima facie case that the trustee’s discretion has miscarried, the absence of reasons and the absence of any evidence before the court as to what happened will tend to make that prima facie case ‘a virtual certainty’” (G E Dal Pont and D R C Chalmers Equity and Trusts in Australia and New Zealand (2nd ed, LBC Information Services, Sydney, 2000) at 622).
Nevertheless, many trustees do not give reasons. This begs the question: If a trustee does not give reasons, how can the trustee show that it:
  • acted honestly and in good faith
  • acted upon a genuine consideration,
  • and
  • exercised the power with due consideration for its proper purpose?
The short answer is that, in addition to closely following the terms of the trust deed, among other things, it is typically best practice to write to all potential recipients inviting them to provide relevant information to the trustee before the trustee makes any decisions. Writing to all potential recipients is an important step as part of what I consider to be best practice before determining how to exercise a discretion regarding payment of superannuation death benefits. Naturally, it is not the only step. Other crucial steps, of course, are actually properly considering the information received, the SMSF’s governing rules, dealing with potential recipients and more. However, I do emphasise that typically seeking information from all potential recipients is a very important step.
I also emphasise that writing to each potential recipient can seem very unintuitive in the context of an SMSF. Naturally, almost all parties will have a detailed knowledge of other parties’ situations. Nevertheless, it is typically an important step on the path to ensuring that trustees properly exercise their discretion regarding how to pay superannuation death benefits. Note: This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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