In this fifth part of our series on the decision of In the matter of Gainer Associates Pty Limited [2024] NSWSC 1138, we examine Gainer’s request for the Court’s advice as to whether it would be justified to remunerate Mr Heesh for his time and efforts in acting as sole director of Gainer in its role as the corporate trustee for a self managed superannuation fund (SMSF) and, if so, at which rate and whether the remuneration could be for some or all of the work completed by Mr Heesh.

See Part 1 for a more detailed background to this case.

Background to Mr Heesh’s SMSF trustee director services remuneration

Mr Heesh’s rate as an experienced chartered accountant and registered liquidator was $660 an hour including GST. Mr Heesh was also regularly appointed to directorships or trusteeships in protected financial management situations, including deceased estates such as in this case, at a reduced rate of $440 an hour including GST.

Mr Heesh produced his timesheet of 219.5 hours for tasks attended to while acting as sole director of Gainer totalling his fees of $96,580 including GST.

His timesheet was for work completed. It did not include remuneration for anticipated work such as work required to defend the corporate trustee removal proceedings, liaising with Gainer’s solicitors in relation to the death benefit decision, or the steps required to liquidate the SMSF’s assets, pay any liabilities and wind up the SMSF as required by the indemnity letter Mr Heesh had obtained from the ATO.

SIS Act and trust deed prohibition on remuneration

The following Rule 14.2 prevented the Trustee from receiving remuneration from the SMSF assets:

Rule 14.2
The Trustee must not to be paid or otherwise receive any remuneration for acting or carrying out its responsibilities as Trustee of the Fund unless otherwise permitted under the Superannuation Laws and/or any determination by the Regulator.

Rule 14.2 is a mirror clause of section 17A(2)(c) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) which states:

(c)  no trustee of the fund receives any remuneration from the fund or from any person for any duties or services performed by the trustee in relation to the fund;

As noted in our Part 4 article, the Court declined to advise that Gainer would be justified in deleting rule14.2. However, the Court accepted that the exception in section 17B(2) of the SIS Act would apply to at least some of Mr Heesh’s work.

Section 17B of the SIS Act allows the remuneration of a director, other than in the capacity of director, for services provided to the SMSF trustee, where the director holds appropriate qualifications and licences to perform that work, carries out the work in the ordinary course of business services offered to the public and the remuneration is no more favourable than arm’s length rates.

Court advises Gainer to be justified to remunerate Mr Heesh $96,580 from SMSF assets

New South Wales Trustee and Guardian (NSWTG), the executor of the deceased’s estate and the entity which engaged and appointed Mr Heesh to his directorship role for Gainer, prepared a suggested allocation of Mr Heesh’s time entries based on his narrations, being $31,900 for acting as sole director and $64,680 for professional service (roughly two-thirds for the latter).

Professional Service - $64,680

Having reviewed Mr Heesh’s timesheets, the Court concluded that the bulk of his work appeared to fall within the section 17B(2) exception and agreed with NSWTG’s analysis, which allocated roughly two-thirds of Mr Heesh’s fees into the professional service category and that could, therefore, be paid by Gainer under the section 17B(2) exception.

Acting as Sole Director - $31,900

The Court made reference to the case of Re Application of Ellasil [2023] VSC 69 that the relevant explanatory memorandum here stated that the purpose of the restriction on remuneration is to “ensure that true remuneration is not used by trustees to obtain access to their superannuation benefits before they are eligible”, in then noting that the payment of Mr Heesh for his professional services is not the mischief to which the remuneration prohibition is directed. In addition, NSWTG submitted that it would not be possible to appoint a qualified director in circumstances such as these without that person expecting to be paid.

The Court noted that the section 17A(2)(c) prohibition against remunerating trustee/directors extended to payments by “any person” and that, therefore, the prohibition would also be triggered if NSWTG paid the directors fees from Gail’s estate.

As to the SMSF trust deed prohibition (ie rule 14.2), the Court found that was not breached as it was not proposed to pay the trustee (ie Gainer) but rather that the Gainer be reimbursed for fees charged by Mr Heesh in his role as director.

In relation to the payment of $31,900 for acting as sole director, the Court stated at paragraph 130 regarding the indemnity letter Mr Heesh and NSWTG obtained from the ATO:

130. […] NSWTG and Gainer have made plain that it is proposed to pay Mr Heesh and the ATO has made plain that it will take no action in this regard. It is in the interests of the Fund that Mr Heesh should complete his duties, for which he is entitled to expect payment. I do not think there is anything to be gained by Mr Heesh delineating the work undertaken in the manner indicated by NSWTG, as the terms of the statute are sufficiently broad that payment for his work as a director of Gainer from the Estate will also make the Fund non-compliant. The trustee has, however, taken reasonable steps to ensure that the noncompliance will not result in the loss of concessional tax treatment. Having done so, I consider that the trustee would be justified in paying Mr Heesh from the Fund. I so advise.

That is, while the payment of director fees by Gainer to Mr Heesh would cause it to be in breach of the SIS Act (but not the SMSF trust deed), given the ATO had effectively stated that it would not let this cause the SMSF to become non-compliant, the Court advised that the director fee payments could be paid.

In addition, the order at paragraph 137(1)(c) of the Judgment was extended to “paying fees issued by TPH Advisory for all work completed by Timothy Heesh in relation to the administration of the Fund” which would appear to permit the payment to Mr Heesh for the future work up until the winding up of the SMSF.

Conclusion – Court allows remuneration even when breach of the SIS Act

This part of the decision is interesting. There is a common misconception that SMSF trustees and directors are not permitted to do actions that cause the SMSF trustee to breach the SIS Act (such as paying a director). That is not the case, as breaching the SIS Act can cause the SMSF trustee to be liable to penalties and tax but does not prohibit such actions (e.g. see our article on Colaciello Super v Christensen). Whereas the trust deed of the SMSF may prevent such actions (and trust deeds often do) and therefore such actions can result in a breach of trust.

This is also a pragmatic decision. The payment of director fees is a breach of the SIS Act that could result in series consequences to the SMSF trustee. Therefore, you would not expect a court to generally authorise such action. However, given the remuneration was not against the purpose of the prohibition, and was required for the operation of the SMSF by an independent director, and that the ATO had effectively stated that the SMSF would not be made non-compliant as a result of the payments, the Court advised the director could be paid.

Phil Broderick
Principal
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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