Super funds still liable to common law claims, NSW court finds

A recent NSW Supreme Court decision is an important reminder that while super funds may be subject to restrictive superannuation and tax laws, in essence they are still a trust and subject to equitable and common law claims, says a legal expert.

Terence Wong, senior association at Sladen Legal, said in the case Cihan Family Trust v Cihan Family Superannuation Fund [2023] NSWSC 1289, the court found that a transfer of land from a family trust to an SMSF should be reversed on the basis of unconscionable conduct of a son against his father.

The case involved a family trust that had been established by the father with the help of his eldest son as the father did not speak English or understand legal documents.

However, the eldest son and the father had a falling out and the younger son then assisted the father to establish an SMSF, of which the father, younger son, his wife, and daughter were members.

The father’s spouse (the mother of the sons) was not a member that meant the father was therefore outnumbered by the other SMSF members three to one.

The younger son had transfers of land signed by the father to transfer property from the father’s family trust to the SMSF without the father understanding what he was signing.

Further, the property transferred was added to the SMSF benefits accounts of the younger son, his wife, and daughter as a contribution, but with no benefit for the father’s SMSF benefits account.

The elder son and father eventually reconciled and the eldest son discovered what the younger son had done in regard to the property transfers and subsequently took the matter to court.

In its ruling, the court unwound the transfer of land for being “unconscionable” as the father had no understanding of what he was being asked by the younger son to sign.

“In doing so, the court noted the father’s special disability in not being able to understand English,” Wong said.

“It was found the younger son sought to take advantage by obtaining the father’s signature on a transfer of land from the father’s discretionary trust to the SMSF that would benefit himself and his family being the other three members of the SMSF.”

Wong said the contribution of the property to the SMSF may have been permitted under the trust deed of the family trust and under the superannuation laws, and therefore, on face value, this would not permit the unwinding of this arrangement.

However, as in the case of Australian Annuities v Rowley Super, there are traditional equitable remedies to claw back contributions to super funds.

In the decision of Australasian Annuities v Rowley Super, the Victorian Court of Appeal held that over $1.6 million of super contributions made by a discretionary trust and members to an SMSF could be clawed back to a liquidator on the basis that the director of the corporate trustee breached his fiduciary duties to the corporate trustee.

Phil Broderick, principal of Sladen Legal, said the case involved what many advisers would consider to be a relatively normal commercial transaction of a corporate trustee borrowing money, making employer super contributions, paying eligible termination payments, and making loans to a beneficiary.

“It also took place in the period where up to $1 million of contributions could be made to super before 30 June 2007 when many similar transactions took place,” he said.

“In simple terms, the breach occurred because the director sought to benefit himself and his immediate family and didn’t consider the other beneficiaries of the trust.”