SMSF trustees – how far does your good faith duty go? The implications of the Marsella decision are wider than you’d think…

The recent decision in the Marsella case confirmed the obligation of SMSF trustees to exercise their discretion when paying a death benefit in good faith, upon real and genuine consideration and in accordance with the purposes for which they are conferred (click here for links to previous alerts about the decisions Re Marsella – appeal court affirms original decision in SMSF death benefit payment decision, SMSF trustee death benefit payment decisions – have you done enough to protect your position? )

The case was about the trustee exercising discretion for the payment of a death benefit. However, there are other discretions that an SMSF trustee commonly exercises, and the same principles will apply.

So what are some of these decisions where the good faith duty applies? They include:

• rolling members out
• allocating income and losses
• admitting a new member
• making investment decisions
• allocating assets to specific members
• paying benefits as lump sums, pensions or transferring assets
• providing information to members
• implementing Family Law superannuation splits.

This good faith duty is rarely considered by an SMSF trustee when making these types of decisions. In many cases, this is not an issue for SMSFs as the interests of the members are usually closely aligned.

However, we are increasingly seeing circumstances where the interests of different members are no longer aligned (such as warring business partners, unhappy families or divorcing couples). In these situations, it is imperative that the best interest duty is properly understood and applied.

Where the decisions by the SMSF trustees have not complied with their good faith duties, the principles in the Marsella case can be used to challenge what the SMSF trustees have done, and potentially result in their removal (as happened in Marsella).

Conclusion

SMSF trustees must be conscious that there could be implications for them and the SMSF if they cannot demonstrate they made decisions in accordance with their good faith duties, particularly if there is disagreement with other trustees or members.

If you would like any information about SMSF trustees’ duties and how that impacts your SMSF, please contact a member of our specialist SMSF team.

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