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Financial planning, Investment and Self Managed Super Fund Article
The duties of a trustee
By Tony Negline
1st May 2005
This article may be out of date.
If your superannuation arrangements are not established specifically by legislation (as most public sector arrangements are), and you want tax concessions for your superannuation investments, then you must use a
trust.
A trust is, of course, a clever little instrument. My revised edition of the CCH Macquarie Dictionary of Law 1996 defines a trust as follows:
An arrangement, developed and enforceable in equity, for the holding and management of property by one party (the trustee) for the benefit of another (the beneficiary) or for some specific purposes. The essence of the trust is the splitting of ownership into a legal and an equitable component. Thus, in an express private trust, the trustee has legal title to the property he/she is bound to safeguard or actively to exploit on behalf of another, or others, who have the equitable ot beneficial ownership of the property.
In relation to retirement funding in Australia, much effort is expended in knowing the obligations and controls the government places on trustees.
It is important to note that given the nature of the Commonwealth Constitution, the Federal Government can’t force trustees to behave in a certain way, so it has a system that says to trustees:
If you want tax concessions for your super fund then you have to irrevocably agree to be bound by a set of rules. If you make this irrevocable election and you break any of these rules we want you to slavishly follow, you may face penalties.
(Author’s opinion).
The only way the Federal Government can fine trustees personally for breaching these rules is to rely on its power to regulate corporations (when a trustee is incorporated) and the old-age pension (for an individual trustee).
In any event the powers and obligations that the Commonweath Government has given to super fund trustees are not the only powers that trustees need to think about, know and understand. There is also the issue of trustee obligations that have been developed and refined over many years by the Courts and legislative developments.
Many years ago I saw an opinion from a very experienced Queen’s Council who argued that the use of such powers would probably not survive a High Court challenge.
As the use of the constitutional powers for controlling the activities of superannuation trustees has never been tested in the High Court, this remains a view only. However, this is not merely theoretical chit-chat and something that can be left to academics to consider. Just imagine the chaos that would almost certainly emerge if the superannuation regulatory regime had no fundamental foundation.
Keep in mind that a QC’s opinion does not indicate how the High Court will ultimately decide issues. The High Court itself is made up of seven highly competent and intelligent people and it only takes four of them to take a certain position for law to be made.
In any event the powers and obligations that the Commonweath Government has given to super fund trustees are not the only powers that trustees need to think about, know and understand. There is also the issue of trustee obligations that have been developed and refined over many years by the Courts and legislative developments.
Trustees have duties and powers. What is the difference? A duty is something that a trustee must do in carrying out the trust. Powers are what the trustee may do in administering the trust.
A trustee does not have to use a power. Rather they must decide if they should use it. There are two types of powers – mere powers and trust powers.
Trustee duties
“Most trustees accept their duties voluntarily. Yet they are policed more strictly in the performance of their duties than parties to a contract. A trustee in breach of their duty will not be required simply to make good any loss suffered by the trust which was reasonably foreseeable as likely to flow from the breach. A trustee in breach will be obliged to restore the trust to the position in which it would have stood had the breach not been committed.” (Evans, M. 1996, ‘Outline of Equity and Trusts’, 3rd edition, Butterworths, pp. 346.)
Many of the obligations mentioned here are varied and even completely abrogated by the terms of a particular trust’s deed.
Upon accepting the trust
New trustees should examine all the relevant documents to make sure everything is in order. The trustee must take possession of all trust property, and if legal title is not vested in the trustee at the outset, they are obliged to do whatever is necessary (including Court proceedings) in order to ensure the property is transferred to them. The trustee should also collect any outstanding debts (other than debts which are intended to be investments).
Preserve trust property
This includes the duty to properly invest the trust property and this must be done with reasonable care, diligence and prudence to avoid any loss or damage. There is also the obligation not to connive or knowingly assist in any act or conduct which would involve a breach of trust or could result in some loss or damage to trust property.
Duty to insure trust property
Every state Trustee Act gives a trustee the power to insure trust property. There are slight differences between the states as to how the insurance premiums should be paid.
Duty to properly invest the trust fund
In doing this a trustee is obliged to exercise reasonable care and diligence and act in the same way as a prudent man of business would act for the benefit of other people for whom they felt morally obliged to provide. Where a trust deed contains a wide range of investments, including investments of a speculative nature, a trustee must still act prudently and in good faith. A trustee may still be in breach of this duty even though all investments fall within the range authorised by the trust instrument.
This duty obviously involves balancing a number of competing factors. Protecting trust funds requires the capital value to be maintained and protected against inflation, where possible. But there is also a need to get the best possible income return from a trust’s investments.
If a trust deed is silent on a particular investment type, then the trustee must look at the range of investments authorised by relevant statute.
A trustee is under the negative duty not to participate in any activity which might cause loss to the trust – including technical wrongs – even if the trustee has acted in good faith.
This includes not dealing with trust funds for the trustee’s personal benefit or to profit from the trust. This means that trustees must be careful to avoid conflicts between duty and personal interest. Trustees should be careful about personally acquiring trust property because their trustee job is to get the highest price and their
personal agenda will be to pay the lowest price.
Subject to certain conditions, trustees can be remunerated for their services. (Please note that SMSF trustees cannot be remunerated for their trustee functions.)
Duty of loyalty
A trustee must be familiar with the terms of the trust and cannot depart from the words of the trust unless a Court has approved otherwise. In other words, the trustee must adhere to the terms of trust. A trustee also has to place the interests of beneficiaries ahead of other concerns which might appeal to the personal views of the trustees.
Duty to keep accounts and supply information
A trustee must keep full and proper accounts of the trust property and must render account when required by the beneficiaries. A trustee has the right to be paid for the cost of producing these accounts.
A trustee must also provide the beneficiaries with a full list of trust investments. If a beneficiary is a minor, the trustee must tell him or her upon becoming an adult of any rights they may have under the trust. (There is some conjecture as to how broad this requirement actually is.)
A beneficiary cannot request documents relating to the trustee’s deliberations
Duty to act personally
A trustee cannot delegate trustee duties unless the delegation is specifically permitted by the trust deed, or is specifically permitted by statute, or (if neither of these are relevant) as a matter of necessity a trustee must appoint an agent.
There is a distinction between the exercise of any powers or discretions conferred on the trustee and other matters concerning the business of the trust.
A trustee must appoint an appropriate agent and ensure the agent is doing their job. There are powers of delegation in every state Trustee Act. If there is more than one trustee they must act unanimously.
Duty to consider
If a trustee is given powers and discretions then the trustee is under a duty to consider how best to exercise them. It may be that doing nothing is the best exercise of a duty, power or discretion.
If a trustee must exercise a power and refuses to do this, then a Court can compel the trustee to act. However failure to exercise a power can be solved by appointing a new trustee or instituting a scheme of arrangement.
The Courts have been traditionally reluctant to interfere in the exercise of any discretion vested in a trustee. It is often hard to argue that a trustee’s discretion hasn’t been made in good faith because trustees do not have to disclose their reasons for doing what they do. This doesn’t mean the Courts haven’t found a way for dealing with this issue.
Duty to act impartially between beneficiaries unless authorised by the trust
This is often applied to distributions of income and capital. This duty has particular application in trusts involving a life tenant and remaindermen and the difference between income and capital can be important.
If a trust owns shares then the payment of dividends is clearly income, however, what happens if profits are distributed through bonus shares or a dividend reinvestment plan? In this situation the shares would belong to the life tenant.
If a trust conducts a business, it will often be difficult to work out what is income and what is capital.
Trustee powers
Trustee powers come from three sources – the trust instrument, statutory powers and any powers conferred by the Court. Most powers can be reduced to the following:
- management powers
- maintenance and advancement powers
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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.
