In the decision of In the matter of Gainer Associates Pty Limited [2024] NSWSC 1138, the Court amongst other things gave advice that the self managed superannuation fund (SMSF) corporate trustee (Gainer Associates Pty Ltd – referred to as Gainer) could be indemnified from the assets of the SMSF in relation to all issues disclosed to the Court in that application for judicial advice.
This is the final part in our six part series on this case.
See Part 1 for a more detailed background to this case.
Background to the claim against Gainer’s SMSF trustee indemnity
The partner of the deceased sole remaining SMSF member, Mr Bone, commenced proceedings seeking to remove Gainer as trustee of the SMSF, and orders were also sought prohibiting Gainer from being indemnified from the assets of the SMSF for its fees and charges and also prohibiting the remuneration of Mr Heesh (the latter being discussed in Part 5 of this series).
Mr Heesh was concerned that his role was not in compliance with section 17A of the Superannuation Industry (Supervision) Act 1993 (SIS Act), because he was not legal personal representative of the sole deceased member and that he sought to be remunerated for his role. Therefore, he sought, and obtained, an indemnity letter from the Australian Taxation Office (ATO) that the ATO would not issue a notice that the SMSF was non-compliant, as long as the SMSF was wound up by 29 November 2024 or an extension was sought.
We discussed in Part 5 of this series that, although you would not expect a court to generally authorise payment of Mr Heesh (given it is prohibited under the SIS Act), here, it was permitted. This was on the basis that, given the remuneration was not related to the mischief which the relevant prohibition sought to curtail (the Court referring to the case of Re Application of Ellasil [2023] VSC 69 that the relevant explanatory memorandum), was required for the operation of the SMSF by an independent director and that the ATO’s indemnity letter effectively stated that the SMSF would not be made non-compliant as a result of the payments, Mr Heesh could be paid for his director services.
Court advice sought to exercise Gainer’s SMSF trustee right of indemnity
Its all well and good for the Court to advise Gainer that it can pay Mr Heesh. But assuming that Gainer has no personal assets, then the only way it can, and would want to, pay Mr Heesh, is to do so from the assets of the SMSF.
Gainer therefore sought the Court’s advice as to whether it would be justified in exercising its right to an indemnity out of the assets of the SMSF under Rule 15.4 of the governing rules of the SMSF. This rule provided:
Rule 15.4
Subject to the Superannuation Laws and the Fund retaining its Complying SMSF status the Trustee is to be indemnified from the Assets of the Fund for any loss, damages or award against the Trustee arising from their role as Trustee of the Fund.
This indemnity provision was wide enough to cover most day to day costs of the SMSF. The question was presumably asked for the purposes accessing the indemnity for paying Mr Heesh and for litigation expenses.
The Court stated, following from advice already given, particularly in relation to the remuneration of Mr Heesh (as covered in Part 5 of this series), that Gainer is entitled to exercise its right to an indemnity out of the assets of the SMSF under Rule 15.4, given in particular that the ATO stated in its indemnity letter that it would not make the SMSF non-compliant as such non-compliance would make the indemnity in breach of Rule 15.4.
The Court noted that it could only advise on indemnification by Gainer out of assets of the SMSF in relation to matters disclosed to the Court, as outlined in the Judgment, and that any further issues not disclosed to the Court could only be indemnified from assets of the SMSF after a further application for judicial advice.
Conclusion – Court advises that Gainer can be indemnified from SMSF assets
The Court advised that Gainer could be indemnified for costs disclosed during the proceedings, including paying Mr Heesh that would otherwise be in breach of SIS Act. This could have resulted differently if the ATO indemnity letter, stating that the ATO would not make the SMSF non-complying for its SIS Act breaches, had not been obtained.
Importantly for Gainer it could also be indemnified for defending the removal proceedings and this request for advice proceedings.
The trustee’s right to indemnify itself from the assets of the trust can sometimes be taken for granted. This part of the decision is an important reminder that trustees should consider the terms of an indemnity, to ensure it is wide enough, particularly for litigation expenses.
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