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Sladen Snippet - Cihan - Transfer of land to an SMSF reversed for unconscionable dealing

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The NSW Supreme Court decision of Cihan Family Trust v Cihan Family Superannuation Fund [2023] NSWSC 1289 found that a transfer of land from a family trust to a SMSF should be reversed on the basis of unconscionable conduct of a son against his father.

Background

The background to this matter is as follows:

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

  • Subsequently, the eldest son and the father had a falling out.

  • The younger brother assisted the father to setup the SMSF, which ended up with the younger brother, his wife and daughter as members along with the father as member. The mother was omitted. The father was therefore outnumbered by the other SMSF members 3 to 1.

  • The younger brother 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 brother, his wife and daughter as a contribution, but with no benefit for the father’s SMSF benefits account.

  • The elder brother made up with the father and found out what had happened and the matter was taken to court.

What the Court determined

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.

It was found that the younger brother sought to take advantage by obtaining the father’s signature on a transfer of land from the father’s discretionary trust to a SMSF setup by the younger brother in which the father was one of four members and was outnumbered. The transfer of land was for the benefit of the younger brother and his family being the other three members of the SMSF. The father, who worked to pay for the land and purchase it into his discretionary trust, was given no interest in the property upon its contribution from his discretionary trust to the SMSF.

Take home message

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. Further, the superannuation laws do not permit benefits to be returned. Therefore, on face value, this would not permit the unwinding of this arrangement.

However, this case 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. Like the decision of Rowley Super, this includes traditional equitable remedies to claw back contributions to super funds.

Phil Broderick
Principal
T +61 3 9611 0163  l M +61 419 512 801  
E pbroderick@sladen.com.au    

Terence Wong
Senior Associate
T +61 3 9611 0112 l M +61 0458 846 022
E twong@sladen.com.au

Terence Wong