AustralianSuper Pty Ltd v McMillan

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
AUSTRALIANSUPER PTY LTD v MCMILLAN
[2021] SASC 147
Judgment of the Honourable Justice Blue
SUPERANNUATION - PRIVATE SECTOR FUNDS - TRUSTEES - GENERALLY
SUPERANNUATION - PRIVATE SECTOR FUNDS - AMENDMENT OF TRUST DEED
EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - MISCELLANEOUS OTHER POWERS, DUTIES AND LIABILITIES - POWER TO VARY TRUSTS
The applicant seeks an order under section 59C of the Trustee Act 1936 (SA) varying the AustralianSuper Trust Deed governing the AustralianSuper Superannuation Fund to insert a new rule 4A empowering the trustee of the Fund to charge a Trustee Risk Reserve Fee.
The motivation for the proposed amendment is that, particularly after 1 January 2022, the trustee of the Fund, and trustees of superannuation funds generally, will be liable to the potential imposition of fines and penalties in relation to any contravention of Commonwealth laws in respect of which they will not be indemnified by their respective superannuation funds. The Applicant has no significant capital of its own out of which to pay any such fine or penalty and in this respect is in a similar position to other trustees of industry superannuation funds.
Held:
1Proper construction of subsections 56(2) and 57(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) considered (at [92]-[113]).
2The proposed rule would not be rendered void by subsections 56(2) or 57(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) (at [145]).
3In the absence of the acquisition by the Applicant of substantial capital, it would be rendered insolvent by the imposition of any significant non-indemnifiable penalty and this would cause very substantial costs and losses to the Fund and thereby to the beneficiaries (at [149]).
4A preferable mechanism to provide capital to a trustee in the position of the Applicant would be for the superannuation fund to acquire shares in the trustee company but this is presently precluded by the Superannuation Industry (Supervision) Regulations 1994 (Cth) (at [165]‑[183]).
5Given current legislative provisions and time constraints, it is not possible to satisfactorily mitigate that risk by 1 January 2022 other than by the introduction of a trustee risk fee of the type proposed (at [184]).
6In the circumstances, there is good reason to vary the trust deed and it is in the interests of the beneficiaries to do so (at [185]).
7In the circumstances, the variation will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class (at [206]).
8The proposed variation accords as far as reasonably practicable with the spirit of the trust, will not disturb the trust beyond what is necessary to give effect to the reasons for the variation and is not motivated by taxation minimisation considerations (at [201]-[203]).
9Given the lack of empirical data and other limitations, the trust deed should be varied to provide for charging by the trustee of an annual risk fee in an amount equal to 0.015% per annum of the net assets of the Fund subject to charging of a lesser amount by the trustee with a monetary ceiling on the annual fee fixed by reference to the trustee risk reserve not exceeding 0.015% per annum of the net assets of the Fund (at [211]).
10Consideration of the other terms of the proposed new rule (at [212]-[239]).
11Order to be made varying the trust deed (at [243]).

Superannuation Industry (Supervision) Act 1993 (Cth) ss 10, 29V, 29VA, 52, 52A, 56, 57, 99G, 120, 123, 126K, 133, 134, 166, 224, Part 2A; Trustee Act 1936 (SA) s 59C; Corporations Act 2001 (Cth) ss 199A, 259A, 259C, 766A, 766H, Part 7.6, Part 7.9, Part 9.4, Part 9.4B, Part 9.4AB, referred to.
Application by Maritime Super Pty Ltd atf Maritime Super [2021] NSWSC 1614; Application by Motor Trades Association of Australia Superannuation Fund Pty Ltd atf Spirit Super [2021] NSWSC 1672; Application by LGSS Pty Ltd atf Local Government Super [2021] NSWSC 1613; Application by NGS Super Pty Ltd atf NGS Super [2021] NSWSC 1694; Application by United Super Pty Ltd atf Construction and Building Unions Superannuation Fund [2021] NSWSC 1679; Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia (2019) 268 CLR 524; In re Richardson; Ex parte Governors of St Thomas’s Hospital [1911] 2 KB 705; Lane v Deputy Commissioner of Taxation (2017) 253 FCR 46; Rankin v Palmer (1912) 16 CLR 285; Re Care Super Pty Ltd [2021] VSC 805; Re Care Super Pty Ltd (No 2) [2021] VSC 854; Re Hest Australia Ltd [2021] VSC 809; Re QSuper Board [2021] QSC 276; Retail Employees Superannuation Pty Ltd v Pain (2016) 115 ACSR 1, considered.

AUSTRALIANSUPER PTY LTD v MCMILLAN
[2021] SASC 147

BLUE J: The applicant, AustralianSuper Pty Ltd (AusSuper), seeks an order under section 59C of the Trustee Act 1936 (SA) varying the AustralianSuper Trust Deed (the Trust Deed) governing the AustralianSuper Superannuation Fund (the Fund or Australian Super) to insert a new rule 4A empowering the trustee of the Fund (the Trustee) to charge a Trustee Risk Reserve Fee (the Risk Fee).
The motivation for the proposed amendment is that, particularly after 1 January 2022, the trustee of the Fund, and trustees of superannuation funds generally, will be liable to the potential imposition of fines and penalties in relation to any contravention of Commonwealth laws in respect of which they will not be indemnified by their respective superannuation funds.[1] The Trustee has no significant capital of its own out of which to pay any such fine or penalty and in this respect is in a similar position to other trustees of industry superannuation funds.
[1] As appears below, they are already not indemnified in respect of some penalties but the range of non‑indemnified penalties will substantially increase in respect of liabilities imposed on or after 1 January 2022.
The application is opposed by the respondent, Samuel McMillan, a member of the Fund, as the representative of all actual and potential beneficiaries of the Fund. The interested party, the Australian Prudential Regulatory Authority (APRA), makes submissions without taking a position in relation to the application.
The application was heard as a matter of priority and these reasons have been prepared as a matter of urgency due to legislative changes (described below) which will apply to liabilities imposed on and after 1 January 2022. These reasons reflect that urgency. I have been greatly assisted by counsel for all parties and in particular thank Mr McMillan for acting as a representative and contradictor and APRA for making submissions to assist the Court.
Background
Superannuation industry
Leaving aside self-managed superannuation funds, superannuation trustees and superannuation funds fall into two broad categories. In the first category, the trustee acts on a commercial, for profit, basis. I refer for convenience to such trustees as commercial trustees and the funds of which they are trustees as commercially operated funds.[2] A commercial trustee charges a fee or fees to its superannuation fund and is free to use the money generated by the fee for its own purposes (including to pay out profits by way of dividends to its shareholders). Commercial trustees tend to be owned and controlled by banks or other financial institutions. Although commercial trustees are motivated by profit, they owe extensive fiduciary and statutory duties to act in the best interests of the members of their funds and, where there is a conflict between their fund’s members and their own interests, to give paramountcy to their duties to their fund’s members.
[2] They are commonly called “retail funds” in Australia but this risks confusion with the dichotomy between retail and wholesale funds.
Governmental regulation requires disclosure of the amount of fees charged by trustees of regulated superannuation funds but (subject to the following qualifications) does not regulate the amount of such fees. Section 99G of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Supervision Act) limits the amount of fees that can be charged by a trustee of a regulated superannuation fund to members with account balances less than $6,000. Section 29V of the Supervision Act limits the types of fees that can be charged to members holding a MySuper product but section 29VA, which imposes charging rules, does not limit the amount of administration fees or investment fees[3] that can be charged (provided that they meet defined equality criteria as between all (relevant) MySuper members).
[3] Section 29VC does limit the amount of certain more minor fees (activity fees and insurance fees) to a cost recovery basis.
In the second category, the trustee acts on a not for profit basis. I refer for convenience to such trustees as non-commercial trustees and the funds of which they are trustees as cooperative funds. There are three broad types of cooperative funds: corporate, public sector and industry funds. Historically, each type was created for a particular class of employees. Corporate funds were created for employees of a private enterprise corporate group. Public sector funds were created for employees of Commonwealth, State or local government. Industry funds were created for employees working in a particular industry. However, many if not most industry and public sector funds are now “public offer funds” open to any member of the public, whether or not employed and whether or not associated with a corporate group, government sector or industry. The original hard and fast distinction between corporate, public sector and industry funds no longer applies. Traditionally trustees of cooperative funds were either several individuals or companies but they now tend to be companies. Typically, individual trustees or directors of corporate trustees comprise a mixture of persons nominated by the relevant employer/employer group and persons nominated by the relevant union(s).
As at June 2021 the value (in billions of dollars[4]) of assets of commercially operated funds and cooperative funds was as follows:[5]
[4] All figures in billions of dollars rounded to the nearest billion unless otherwise shown.
[5] Source: APRA-published Quarterly Superannuation Performance Statistics key statistics page exhibited to the affidavit of Eva Scheerlinck.

Fund Type Retail Cooperative Total

Commercially operated $689 billion

Industry $927 billion

Public sector $584 billion

Corporate $61 billion

Total $689 billion $1,572 billion $2,261 billion

History

AusSuper was incorporated in August 1985. The Fund was established in December 1985 by AusSuper executing the Trust Deed establishing the Fund (originally called the Metal Union Superannuation Trust), which was deemed to have come into operation on 1 August 1985. The Fund was an industry superannuation fund. Membership was open to employees of employers who executed a deed of adherence. Shareholders and directors of AusSuper were employer and union associations or representatives.
When the Fund was established, there were no compulsory superannuation contributions by employers for employees and no federal government regulation of superannuation funds as such. In the National Wage Case in June 1986, the Conciliation and Arbitration Commission introduced compulsory superannuation into some industrial awards at the rate of three per cent of wages and this was subsequently extended to other awards.
In 1987 the Commonwealth enacted the Occupational Superannuation Standards Act 1987 (Cth), which introduced limited regulation of superannuation funds. In 1992 the Commonwealth enacted the Superannuation Guarantee legislation making superannuation contributions by employers generally mandatory.
In 1993 the Commonwealth enacted the Supervision Act to regulate superannuation funds more comprehensively than the Occupational Superannuation Standards Act 1987 (Cth).
In 2002 the Corporations Act 2001 (Cth) (the Corporations Act) was amended by the insertion of Part 7.6 to introduce a requirement for persons carrying on a financial services business to hold an Australian Financial Services Licence (AFS licence) issued by the Australian Securities and Investments Commission (ASIC).
In 2004 the Supervision Act was amended by the insertion of Part 2A to introduce a requirement for certain superannuation trustees, including the Fund, to hold an RSE licence issued by APRA.
In 2006 the Fund merged with two other funds, Australian Retirement Fund and FinSuper. Its name was changed to AustralianSuper. Membership eligibility had in the meantime been expanded.
In 2012 the Supervision Act was amended by the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 (Cth) and the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 (Cth) to impose additional obligations on trustees and directors of superannuation trustee companies.
In 2018 and 2019 the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Hayne Royal Commission) was conducted by former High Court Justice the Honourable Kenneth Hayne AC QC. This triggered both legislative amendments to increase statutory regulation of superannuation funds and increased enforcement activities by regulators. In particular, ASIC instituted proceedings against several commercial trustees.
In 2019 the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) and Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Act 2019 (Cth) amended the Corporations Act and the Supervision Act to increase the number of provisions contravention of which give rise to a criminal or civil penalty. In particular, section 54B was inserted into the Supervision Act[6] to provide that contravention of a section 52 or 52A covenant is a civil penalty provision such that contravention may give rise to a civil penalty order under section 196 (or an offence under section 202 if the contravention is fraudulent or dishonest and intended to gain an advantage).
[6] By the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Act 2019 (Cth).
In 2020 and 2021 the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, Treasury Laws Amendment (Your Future, Your Super) Act 2019 (Cth) and Financial Sector Reform (Hayne Royal Commission Response No 2) Act 2020 amended the Supervision Act and the Corporations Act to impose additional obligations on trustees of superannuation funds, many of which give rise to criminal or civil penalties. In particular, sections 766A and 766H were inserted into the Corporations Act[7] to provide that a person provides a financial service if they operate a registrable superannuation entity as trustee of the entity. This had the effect that trustees of regulated entities are now required to hold an AFS licence, are subject to the licensing requirements and financial product disclosure requirements in Parts 7.6 and 7.9 respectively and are subject to the criminal, civil penalty and infringement notice provisions in Parts 9.4, 9.4B and 9.4AB respectively. Chapter 7 of the Corporations Act had been amended in 2019[8] to increase the number of civil penalty provisions, penalties for criminal offences and provisions for which infringement notices could be issued. In addition, the Supervision Act was amended[9] to give to ASIC powers to enforce provisions of the Supervision Act protecting consumers from harm, market integrity, disclosure and record keeping.
[7]    By the Financial Sector Reform (Hayne Royal Commission Response) Act 2020.
[8]    By the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth).
[9]    By the Financial Sector Reform (Hayne Royal Commission Response) Act 2020.
In March 2021 ASIC commenced a civil penalty proceeding in the Federal Court against the trustee of an industry superannuation fund alleging that it made false or misleading representations to approximately 12,500 members representing that they held insurance cover when they did not and deducting approximately $1.5 million from members’ account for insurance premiums in respect of insurance that did not exist. ASIC commenced another civil penalty proceeding in the Federal Court against a different trustee of a different industry superannuation fund alleging that it made false or misleading representations to members about their ability to transfer their superannuation out of the fund. These two proceedings have not yet been determined.
Subsections 56(2) and 57(2) of the Supervision Act presently render void a provision of the governing rules of a superannuation entity insofar as it would have the effect of indemnifying a trustee, or director of a trustee, of the entity amongst other things against:
·liability for a civil penalty in respect of a contravention of a provision of the Supervision Act identified as a civil penalty provision;
·liability for an administrative penalty imposed by section 166 of the Supervision Act in respect of defined contraventions of the Supervision Act in relation to self managed superannuation funds; and
·payment of an amount payable under an infringement notice issued by APRA under section 224 of the Supervision Act in respect of a contravention of a defined offence or civil penalty provision of the Supervision Act.
With effect on 1 January 2022 those subsections will be repealed and replaced[10] by subsections that refer amongst other things instead to:
·liability for a criminal penalty incurred by a superannuation trustee in relation to a contravention of any law of the Commonwealth;
·liability for a civil penalty incurred by a superannuation trustee in relation to a contravention of any law of the Commonwealth;
·liability for an administrative penalty incurred by a superannuation trustee in relation to a contravention of any law of the Commonwealth; or
·payment of an amount payable under an infringement notice (however described) given under any law of the Commonwealth.
[10] By the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) Schedule 9 items 63 and 64.
The substantive changes that will be the affected by the amendments (albeit achieved by the repeal and replacement of the respective subsections) to subsections 56(2) and 57(2) will be to the following effect:
A provision in the governing rules of a superannuation entity is void in so far as it would have the effect of exempting a [trustee[11]/director of the trustee[12]] of the entity from, or indemnifying a trustee of the entity against:
[11] Section 56(2).
[12] Section 57(2).
(a)     liability for breach of trust if the trustee:
(i)    fails to act honestly in a matter concerning the entity; or
(ii)intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the trustee was required to exercise; or
(b)     liability for ~~a monetary penalty under a civil penalty order~~[13] an amount of a criminal, civil or administrative penalty incurred by the trustee of the entity in relation to a contravention of a law of the Commonwealth (including this Act); or
(c)     the payment of any amount payable under an infringement notice[14] (however described) given under a law of the Commonwealth (including this Act); or
(d)     liability for the costs of undertaking a course of education in compliance with an education direction[15] (within the meaning of this Act)~~; or~~.
~~(e)~~     ~~liability for an administrative penalty imposed by section 166~~.
[13] A civil penalty order is defined to mean a declaration or order under section 196 and thereby is confined to orders in respect of contraventions of defined provisions of the Supervision Act. After the amendments come into force on 1 January 2022, this paragraph will no longer referred to a civil penalty order.
[14] An infringement notice in the present version means an infringement notice issued by APRA under section 224 in respect of a contravention of a defined offence or civil penalty provision of the Supervision Act.
[15] An education direction is defined by sections 10 and 160 to mean an education direction given by APRA under section 160 in respect of a contravention of the Supervision Act in relation to a self managed superannuation fund.

The amendment will expand the invalidation of governing rules of a superannuation entity in respect of indemnification of a trustee or director of a trustee to apply to:
·a fine or other amount payable in respect of a Commonwealth offence;
·a civil penalty under Commonwealth legislation other than under the Supervision Act (which is already encompassed by the existing provisions); and
·an administrative penalty under Commonwealth legislation other than under the Supervision Act (which is already encompassed by the existing provisions).
In November 2021 APRA issued a Discussion Paper entitled Strengthening Financial Resilience in Superannuation (the APRA Resilience Discussion Paper). The Paper refers to legislative changes made since the Hayne Royal Commission, including the forthcoming amendments to sections 56 and 57 of the Supervision Act. It refers to the importance of building a financial contingency reserve on a trustee’s balance sheet to meet non-indemnifiable penalties. It refers to the importance of setting fees that are appropriate and proportionate and in the best financial interests of beneficiaries. It invites submissions by 11 March 2022, which submissions may inform the need for enhancements to the prudential framework to ensure that RSE licensees prudently manage their financial resilience in the best financial interests of beneficiaries.
AusSuper has never incurred a significant fine or civil or administrative penalty or amount payable under an infringement notice. The only penalties that it has ever incurred are relatively insignificant late lodgement fees incurred with ASIC. There is currently the potential for ASIC to impose late lodgement fees on AusSuper in respect of a failure to lodge or lodge correctly notices of updates to product disclosure statements resulting from a misinterpretation of the requirements by AusSuper.
The Trustee
AusSuper has share capital of $12. Six A class shares are held by ACTU Super Shareholding Pty Ltd, a company owned and controlled by the Australian Council of Trade Unions. Six B class shares are held by Australian Industry Group, a peak national employer organisation. Under AusSuper’s Constitution, A and B class shares have equal rights. An A or B class shareholder has the right to vote at general meetings but does not have a right to dividends or return of capital on a winding up.
AusSuper has 12 directors. Five directors are appointed by ACTU Super Shareholding and five directors are appointed by Australian Industry Group. Two directors are independent, being appointed by the board.
The Fund
The Fund had over 2.4 million members and net assets excluding member benefits (net assets) valued at $233 billion as at 30 June 2021. It is Australia’s largest superannuation fund.
The Fund has nine superannuation products. The AustralianSuper Plan is the largest product, is an accumulation product, is open to all, is the Fund’s MySuper product and has approximately two million members and net assets of $144 billion.[16] The next largest accumulation plan is the Personal Plan for persons other than employees (self-employed or not employed) and has approximately 200,000 members and net assets of $29 billion. The other five accumulation products are for employees of particular types of employers as follows:
·Super Options for employees of employers who provide income protection as part of employment benefits and it has net assets of $13 billion;
·Public Sector Division for employees of government employers and it has net assets of $11 billion;
·AustralianSuper Select for employees of employers who provide tailored insurance arrangements as part of employment benefits and it has net assets of $3 billion;
·GHD Superannuation Plan for employees of GHD Services Pty Ltd and it has net assets of $563 million; and
·Super Only for employees of employers who provide superannuation without default insurance cover and it has net assets of $6 million.
[16] All member numbers and asset values are as at 30 June 2021.
The Fund has two pension products:
·Choice Income being an account based pension product and it has net assets of $30 billion; and
·TTR Income being a transition to retirement income stream product and it has net assets of $1.5 billion.
The Fund has 12 investment options that can be chosen by a member regardless of the product that the member has. The largest investment option is the Balanced investment option, which is the Fund’s default investment option and has investments of approximately 2.2 million members and net assets of $169 billion. The other 11 investment options are:
·High Growth; Socially Aware; Indexed Diversified; Conservative Balanced; and Stable (each encompassing mixed asset classes);
·Australian Shares; International Shares; Property; Fixed Interest; and Cash (each comprising a single asset class); and
·Member Direct (comprising assets selected by the member).
Financial aspects
The Trustee engages external asset managers in respect of some asset classes and its own personnel undertake asset management in respect of other asset classes. Investment costs incurred by the Trustee include fees paid to external asset managers and wages and salaries and other costs associated with internal asset management (investment expenses).
The Trustee employed the full-time equivalent of 894 persons as at 30 June 2021. Some personnel were engaged in or associated with asset management and others were engaged in or associated with administration and other operations of the Trustee.
The Fund charges to members an investment fee for the purpose of recouping investment expenses. The investment fee is fixed at a percentage of a member’s account balance. The investment fee for the financial year ending 30 June 2021 for the Balanced investment option under the Choice Income product was 0.62 per cent and under all other products was 0.63 per cent.[17] The investment fee for the other investment options ranged from 0.06 per cent to 0.68 per cent. The total investment fees charged to members for the financial year ending 30 June 2021 were $523 million,[18] of which $276 million was internal costs (paid to the Trustee) and the balance was external costs.
[17] The difference is due to more favourable taxation treatment for persons in retirement in receipt of a pension (Choice Income members).
[18] All figures in millions of dollars rounded to the nearest million unless otherwise shown.
The Fund charges to members an administration fee for the purpose of recouping costs incurred by the Trustee associated with administration and other operations apart from investment (operation expenses). The administration fee charged to members for the financial year ending 30 June 2021 had a fixed and variable component. The fixed component was $2.25 per week regardless of product. The variable component was a percentage of the member’s account balance calculated monthly. The percentage for the two pension products was 0.11 per cent with the total variable fee capped at $750 per annum. The percentage for the seven accumulation products was 0.04 per cent or such lesser amount as the Trustee in its discretion might choose to charge. The percentage component is relatively new and the Trustee has in fact charged well below the maximum.
The amount of administration fees debited to customer accounts is credited to an Administration Reserve in the equity section of the Fund’s balance sheet. Operation expenses are debited to the Administration Reserve. As at 30 June 2021 the total amount standing to the credit of the Administration Reserve was $134 million. This amount has accumulated over the last few years as a result of administration fees charged to members exceeding operation expenses, income tax deductions credited to the Reserve and transfers from (or to) the Investment Reserve.
The Fund has three other reserves. The Operational Risk Financial Reserve (the Operational Risk Reserve) is required by legislation. Section 52(8)(b) of the Supervision Act imposes a covenant in the governing rules of a registrable superannuation entity requiring a trustee to maintain and manage (in accordance with the prudential standards set by APRA) financial resources (whether capital of the trustee, a reserve of the superannuation fund or both) to cover the operational risk that relates to the entity. The Operational Risk Reserve is funded from a portion of the difference between net income earned by the Fund and amounts credited to members’ accounts or by transfers from the Investment or Administration Reserve. It is only used to cover losses sustained by members arising from an operational risk. As at 30 June 2021 the total amount standing to the credit of the Operational Risk Reserve was $566 million. The Insurance Reserve is used to cover timing differences between the payment of insurance premiums by the Fund to the external insurer and debiting of the premiums to members’ accounts. As at 30 June 2021 the total amount standing to the credit of the Insurance Reserve was $102 million.
The Investment Reserve is credited with investment earnings, investment expenses (including taxation) are debited to the reserve and credits to members’ accounts are debited to the reserve. Transfers may be made between the Investment Reserve and the Administration Reserve or Operational Risk Reserve. As at 30 June 2021 the total amount standing to the credit of the Investment Reserve was $90 million. The Investment Reserve and the Administration Reserve are essentially general reserves.
The financial statements for the Fund for the financial year ended 30 June 2021 show total investment and other revenue earned by the Fund was $40 billion. Expenses incurred by the Fund comprised $523 million of investment expenses and $348 million of administration expenses. The Fund paid tax at the rate of 15 per cent of taxable income.
The financial statements for AusSuper for the financial year ended 30 June 2021 show trustee services income of $624 million, expenses totalling $624 million and $0 profit. Trustee services income is a combination of internal investment and administration fees. The financial statements show an income tax expense of $12,000 which is the result of expenses incurred that are non-deductible for taxation purposes. The Trustee pays income tax at the general corporate tax rate of 30 per cent.
Evidence
Oral evidence was given by AusSuper’s chief executive officer Paul Schroder. Three affidavits by Mr Schroder were tendered (affirmed on 3 September and 5 and 18 October 2021), together with two affidavits by his predecessor Ian Silk (affirmed on 2 and 29 September 2021) which Mr Schroder adopted and confirmed.
Mr Schroder and Mr Silk gave evidence about AusSuper, the Fund, changes in the regulatory environment since 1985, risk management undertaken by AusSuper, insurance cover held by AusSuper, an assessment by AusSuper employees of future risks of penalties being imposed on it in respect of which they will not be indemnified by the Fund and calculations by AusSuper employees in relation to the proposed Risk Fee.
Oral evidence was given by Tanya Ferguson, an employee of insurance broker Aon Australia. One affidavit by Ms Ferguson (affirmed on 28 September 2021) was tendered. Ms Ferguson gave evidence concerning AusSuper’s insurance policies, the insurance market, the availability and terms of insurance cover for superannuation trustees and, to a limited extent, captive insurance arrangements.
Oral evidence was given by Eva Scheerlinck, Chief Executive Officer of the Australian Institute of Superannuation Trustees (AIST). One affidavit by Ms Scheerlinck (affirmed on 5 October 2021) was tendered. AIST is a not for profit company that represents the interests of cooperative superannuation funds and has 40 members that are Australian superannuation funds with combined assets valued at approximately $900 billion. Ms Scheerlinck gave evidence concerning changes in the regulatory environment affecting superannuation funds, including the forthcoming amendments to sections 56 and 57 of the Supervision Act, and the response of AIST to those changes.
Written opinions by Dr Vivienne Brand dated 14 September 2021 and Dr Pamela Hanrahan dated 13 September 2021 were tendered. Dr Brand is an Associate Professor in the College of Business, Government and Law at Flinders University. Her qualifications include a Bachelor of Laws, Master of Laws and Doctor of Philosophy. Dr Hanrahan is Professor of Commercial Law and Regulation at the University of New South Wales Business School. Her qualifications include a Bachelor of Laws, Master of Laws and Doctor of Juridicial Science. They each addressed changes in the regulatory environment affecting superannuation funds. They did not give oral evidence.
A counsel opinion by Jennifer Batrouney QC and Suzanne Mackenzie, counsel for AusSuper, dated 8 October 2021 was tendered on a confidential basis.
Various documents, primarily comprising business records of the Trustee or the Fund, were tendered by AusSuper (as exhibits to affidavits or independently) and by Mr McMillan.
Several items of evidence were confidential (including the subject of confidentiality obligations by AusSuper towards third parties) and were the subject of evidence received in closed court in order to preserve that confidentiality.
Power to vary the Trust Deed
Section 59C of Trustee Act 1936 (SA) (the Trustee Act) provides:
59C—Power of Court to authorise variations of trust
(1)The Supreme Court may, on the application of a trustee, or of any person who has a vested, future, or contingent interest in property held on trust—
(a)     vary or revoke all or any of the trusts; or
(b)     where trusts are revoked—
(i)distribute the trust property in such manner as the Court considers just; or
(ii)resettle the trust property upon such trusts as the Court thinks fit; or
(c)     enlarge or otherwise vary the powers of the trustees to manage or administer the trust property.
(2)In any proceedings under this section the interests of all actual and potential beneficiaries of the trust must be represented, and the Court may appoint counsel to represent the interests of any class of beneficiaries who are at the date of the proceedings unborn or unascertained.
(3)Before the Court exercises its powers under this section, the Court must be satisfied—
(a)     that the application to the court is not substantially motivated by a desire to avoid, or reduce the incidence of tax; and
(b)     that the proposed exercise of powers would be in the interests of beneficiaries of the trust and would not result in one class of beneficiaries being unfairly advantaged to the prejudice of some other class; and
(c)     that the proposed exercise of powers would not disturb the trusts beyond what is necessary to give effect to the reasons justifying the exercise of the powers; and
(d)     that the proposed exercise of powers accords as far as reasonably practicable with the spirit of the trust.
(4)An order made by the Supreme Court in the exercise of powers conferred by this section is binding upon all present and future trustees and beneficiaries of the trust.
(5)This section does not apply to—
(a)     a trust affecting property settled by an Act; or
(b)     a charitable trust.
(6)This section does not derogate from any other power of the Supreme Court to vary or revoke a trust, or to enlarge or otherwise vary the powers of trustees.
This Court’s jurisdiction to entertain an application to vary a trust is conditioned on satisfaction of three[19] prerequisites:
·the existence of a trust;[20]
·an application by a trustee of the trust or person with an interest in property held on trust;[21] and
·the interests of all actual and potential beneficiaries being represented in the proceeding.[22]
[19] There is also a negative requirement imposed by section 59C(5) that the trust not be a charitable trust or a trust affecting property settled by an Act but there is no suggestion that this applies in the present case and it can be ignored.
[20] Implicit in section 59C.
[21] Subsection 59C(1).
[22] Subsection 59C(2).
This Court’s power to vary a trust is conditioned on satisfaction of six prerequisites:
·there is good reason to make the variation;[23]
·the variation is in the interests of beneficiaries;[24]
·the variation will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class;[25]
·the variation accords as far as reasonably practicable with the spirit of the trust;[26]
·the variation will not disturb the trust beyond what is necessary to give effect to the reasons for the variation;[27] and
·the application is not substantially motivated by a desire to avoid or reduce the incidence of tax.[28]
[23] This requirement is implicit in the requirement that the proposed exercise of powers would not disturb the trusts beyond what is “necessary to give effect to the reasons justifying the exercise of the powers” and would be “in the interests of beneficiaries”.
[24] Section 59C(3)(b). It may be that the second and third prerequisites are a single composite prerequisite, but it is convenient to treat them separately.
[25] Section 59C(3)(b).
[26] Section 59C(3)(d).
[27] Section 59C(3)(c).
[28] Section 59C(3)(a).
The meaning of these prerequisites was articulated in some detail in Retail Employees Superannuation Pty Ltd v Pain,[29] which I adopt.
[29] [2016] SASC 121, (2016) 115 ACSR 1 at [160]-[180].
If the prerequisites are satisfied and the Court entertains the application, the Court nevertheless has a discretion whether to make the order. Given the comprehensive nature of the prerequisites, ordinarily it may be expected that there would need to be some reason not to make the order if all of the prerequisites are satisfied.
Conditions of jurisdiction
The three conditions for jurisdiction under section 59C of the Trustee Act are satisfied. The applicant is the trustee of the Fund, which is a trust, and Mr McMillan represents the interests of all actual and potential beneficiaries of the Fund.
None of the prerequisites relates to any connection between the Trust and South Australia. The Court has jurisdiction to entertain an application even if there is no connection between a trust and South Australia.[30]
[30] See In re Ker’s Settlement Trust[1963] 1 Ch 553 at 556 per Ungoed-Thomas J; In re Paget’s Settlement[1965] 1 WLR 1046 at 1050 per Cross J; Retail Employees Superannuation Pty Ltd v Pain (2016) 115 ACSR 1 at [181]-[182] per Blue J.
The Court has a discretion to decline to entertain an application if there is no or an insufficient connection between a trust and South Australia.[31]
[31] In re Paget’s Settlement [1965] 1 WLR 1046 at 1050 per Cross J; Faye v Faye[1973] WAR 66 at 70 per Lavan J; Salkeld v Salkeld (No 2)[2000] SASC 296 at [26] per Perry J; Thomas Hare Investments Limited v Hare (2012) 34 VR 656 at [33] per Habersberger J; Retail Employees Superannuation Pty Ltd v Pain (2016) 115 ACSR 1 at [182] per Blue J.
As at June 2021, there were over 160,000 members of the Trust in South Australia with account balances totalling over $15 billion. There is a real and substantial connection with South Australia. There is no improper purpose in AusSuper bringing the application in South Australia. The application should be entertained.
The proposed amendment
Proposed rule 4A of the Trust Deed would provide:
4A Trustee Risk Reserve Fee
4A.1For each financial year of the Fund commencing with the financial year ending 30 June 2022, a fee is payable to the Trustee in an amount equal to 0.015% per annum of the net assets of the Fund calculated as at the end of the previous financial year (the "Trustee Risk Reserve Fee").
4A.2The Trustee Risk Reserve Fee is to be paid in such periodic instalments as determined by the Trustee from time to time.
4A.3The Trustee:
(1)     must suspend payment of further amounts of the Trustee Risk Reserve Fee if and for so long as (but only for so long as), immediately following such payment, the Trustee determines that the balance of the Trustee Risk Reserve would exceed the greater of:
(a)an amount equal to three times the maximum Trustee Risk Reserve Fee payable for that financial year; and
(b)such amount (if any) as the Relevant Requirements require or as a Responsible Authority recommends, requests or directs the Trustee to hold as capital on its own account; and
(2)     may otherwise determine in its absolute discretion to reduce, waive, suspend or postpone the Trustee Risk Reserve Fee (or any part of it) and, subject to Rule 4A.3(1) to cease such reduction, waiver, suspension or postponement.
4A.4For the purpose of this Rule 4A, a reference to the "Trustee Risk Reserve" is to the balance of funds held by the Trustee as capital on its own account which is referable to the Trustee Risk Reserve Fee which has been paid from time to time. For the avoidance of doubt, the Trustee Risk Reserve does not form part of the assets of the Fund and (other than as set out in this Rule 4A) is not subject to the terms of this Deed.
4A.5 The Trustee must disclose the following information to members within three months after the end of each financial year:
(1)     the amount(s) of the Trustee Risk Reserve Fee paid in the previous financial year; and
(2)     the balance of the Trustee Risk Reserve as at the end of that financial year, by publishing this information on the website of the Fund or by such other technological means of communication.

Clause 2.2 defines the terms “Relevant Requirements” and “Responsible Authority”, which are used in proposed rule 4A.3(1)(b) as follows:
“Relevant Requirements” means any standard, covenant or other requirement under the SIS Act, Tax Act, Corporations Act 2001, Family Law Act 1975, Bankruptcy Act 1966 or any other Law, or of a Responsible Authority:
(a)imposed on the Trustee; or
(b)imposed in relation to the Fund; or
(c)which the Fund must satisfy to qualify for the most favourable taxation treatment available to superannuation funds; or
(d)which the Trustee or the Fund must satisfy to avoid any penalty, detriment or disadvantage which is or may become payable in connection with the Fund or anything done or to be done under this Deed; or
(e)with which the Trustee or the Fund must comply to ensure that the Trustee remains an approved trustee for the Fund continues to hold to hold an RSE licence,
and includes any proposed requirements which the Trustee believes will have retrospective effect. However, if such a standard, covenant or other requirement ceases to be in force or the Responsible Authority does not require it to be complied with either generally or in relation to the Fund or one of the Parts of the Fund, then that standard, covenant or requirement ceases to be a Relevant Requirement to that extent;
“Responsible Authority” means APRA, ASIC, or any other government authority responsible for administering the Laws or any other rules governing superannuation funds or the availability of income tax concessions to superannuation funds;
If the amendment is made, the Board of Directors of AusSuper proposes to adopt a Trustee Risk Reserve Policy (the Policy). The Policy provides that it is to be reviewed at least every three years by AusSuper’s Finance and Audit Committee and Board. It can be amended or rescinded at any time by the Board.
The Policy provides that the purpose of the Risk Reserve is to provide financial resources outside the Fund to ensure the ongoing solvency of the Trustee and to pay amounts considered necessary or desirable to discharge liabilities or manage financial risk of the Trustee or a director or officer of the Trustee, including any liability for taxation incurred in connection with the Risk Reserve created under the Policy. It provides for the creation of a Trustee Risk Reserve (the Risk Reserve) in the accounts of AusSuper. The Policy provides that amounts in the Risk Reserve can only be applied for this purpose or to be invested in appropriate investments or to repatriate amounts to the Fund.
The Policy provides that the Board will determine a Target Amount of the Risk Reserve with effect from 1 January 2022, to be reviewed at 1 January 2023 and thereafter at least biennially. The Policy provides that, in the event that a material payment (exceeding 10 per cent of the balance of the Risk Reserve) is made from the Risk Reserve, management will review the balance of the Risk Reserve as against the Target Amount and develop a replenishment plan for recommendation to the Board in setting the amount of the Risk Fee.
Rationale for the proposed amendment
The background to the proposed introduction of the Risk Fee is that AusSuper only has share capital of $12 and after 1 January 2022 it will not be able to be indemnified by the Fund against a liability for a fine or civil or administrative penalty or amount payable under an infringement notice under Commonwealth legislation (collectively a penalty). The rationale for the proposed introduction of the Risk Fee is that the Trustee would become insolvent if it were to incur a penalty in any significant amount.
If AusSuper were to become insolvent, it would be unable to continue as trustee of the Fund. Section 120(2) of the Supervision Act defines a “disqualified person” amongst others as a company in respect of which a receiver, manager, administrator or provisional liquidator has been appointed or which is being wound up. Section 126K prohibits a disqualified person from acting as a trustee of a superannuation entity. Sections 133 and 134 empower APRA to remove a disqualified person as trustee of a superannuation entity and appoint a replacement trustee to act as trustee until the vacancy is filled.
At first sight, it might be thought that it would be relatively easy for AusSuper to be replaced with an alternative trustee of the Fund. However, the evidence establishes that this is not the case and that there would be a very substantial cost and detriment to the Fund and therefore to the members of the Fund in that event.
If AusSuper were unable to continue as trustee of the Fund, theoretically there would be three alternatives. First, the appointment of a replacement trustee to take over as the long term trustee of the Fund. Secondly, a winding up of the fund under the control of a short term replacement trustee. Thirdly, a merger of the fund with another superannuation fund under the control of a short term replacement trustee.
Any replacement trustee (whether long term or short term) would be required to hold an AFS licence from ASIC and an RSE licence from APRA. APRA indicated in submissions that it would be unlikely to appoint or license a replacement trustee that had the same directors as a trustee that had become a disqualified person. It appears that there are three companies that hold an RSE licence that could be appointed by APRA as an acting trustee. However, that power has never been exercised in respect of a large superannuation fund of the order of the Fund. Any trustee appointed by APRA would only be an acting trustee in the short term and it would still be necessary to procure a long term replacement trustee if the first alternative could be pursued. Any acting trustee appointed by APRA would charge substantial fees.
Although trustees of existing superannuation funds do not necessarily have significant capital or financial support from their shareholders, it appears likely that a replacement trustee would be required to have substantial capital or financial guarantees in order to obtain a RSE licence. This would have to be provided in some form by the Fund, either by directly providing the capital or by paying fees of the type proposed by AusSuper to create such capital. Even if a replacement trustee could be procured without substantial capital, that trustee would run the same risk of insolvency as would have been run by (and hypothetically materialised for) AusSuper. On the evidence adduced before me, it appears unlikely that a long term replacement trustee could be procured in respect of a superannuation fund of the size of the Fund.
Mr Silk and Mr Schroder gave evidence that, even if a long term replacement trustee could be procured to take over as trustee of the Fund, there would be very substantial costs and losses incurred by the Fund. This would include very significant direct costs, being internal and professional costs, involved in replacing the trustee; cash flow and liquidity issues caused by members potentially seeking to withdraw their benefits from the Fund and employers ceasing to nominate the Fund as the default fund; and significant business disruption adversely impacting on fund governance, management and investments. Mr Silk and Mr Schroder estimated that the direct costs incurred by the Fund in this scenario would be in excess of $100 million. Mr Schroder gave evidence that, in addition to these costs, there would be a potential loss of value of the assets of the fund, which would potentially be billions of dollars.
Mr Silk and Mr Schroder gave evidence that, in the second and third scenarios, both the costs and losses to the Fund would be much greater than in the first scenario.
Amounts of proposed Risk Fee and Risk Reserve
Personnel of AusSuper compiled a list of legislative provisions that impose a Commonwealth penalty. They identified approximately 600 such provisions and identified the maximum penalty that might be imposed under each such provision. The provisions principally comprised provisions of the Corporations Act and Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), the Supervision Act and the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth).
Personnel of AusSuper assigned a probability of AusSuper breaching each provision during any given year (breach probability) ranging from two per cent (a one in 50 year event) to 20 per cent (a one in five year event). They assigned a probability of enforcement action being taken by the regulator in the event of a breach (enforcement probability). They assigned one of three levels of penalties being imposed (penalty levels) at rates of 25 per cent, 50 per cent and 75 per cent of the maximum penalty that might be imposed under the legislation (maximum penalty).
Personnel of AusSuper in respect of each legislative provision multiplied the maximum penalty by the breach probability and the enforcement probability and by each of three different penalty levels to give three different dollar amounts in respect of the legislative provision. They then summed totals for the legislative provisions. This resulted in a total amount based on a 25 per cent penalty level of $20.8 million; a 50 per cent penalty level of $41.6 million and a 75 per cent penalty level of $62.5 million. They also undertook a sensitivity analysis by increasing or decreasing the various probabilities by 25 per cent.
Personnel of AusSuper recommended an annual Risk Fee cap set at 0.015 per cent of Fund assets, which would be equivalent to $35 million based on the value of Fund assets as at 30 June 2021. This was selected as being towards the lower end of the range between $20.8 million and $62.5 million.
Personnel of AusSuper recommended a Target Amount for the Risk Fee. This was based on the top of the range between $20.8 million and $62.5 million, discounted by 10 per cent on the basis that some civil and administrative penalties would be covered by insurance.
Personnel of AusSuper recommended that a Risk Reserve cap be set at three times the annual Risk Fee cap. This is equivalent to $104 million based on the value of Fund assets as at 30 June 2021. This is towards the upper end of a range between $78.1 million based on a 50 per cent penalty level and $117.1 million based on a 75 per cent penalty level, in each case applying the most pessimistic sensitivity analysis scenario.
The calculations by and recommendations of AusSuper personnel were reviewed by PricewaterhouseCoopers, who concluded that they were reasonable.
If the Trustee charges the Risk Fee to the Fund, the fee would represent income taxable in the hands of the Trustee, taxable at the rate of 30 per cent. It is expected that the fee would be a deductible expense for the Fund but, because the Fund only pays income tax at the rate of 15 per cent, there would be a net loss of 15 per cent of the Risk Fee. This net loss would effectively be borne by members of the Fund because the Trustee would use part of the fee to pay income tax payable by it.
In addition, any income earned by the Trustee by investing amounts in the Risk Reserve would represent income taxable in the hands of the Trustee, taxable at the rate of 30 per cent. If those amounts had remained in the Fund instead, income earned by the Fund by investing those amounts would represent income taxable in the hands of the Fund, taxable at the lesser rate of 15 per cent.
Income earned by the Trustee on the investment of the Risk Reserve would be likely to be less than income earned by investing member’s monies in the Fund because it is likely that it would be invested more conservatively given its purpose.
If the Trustee charges the Risk Fee to the Fund, the fee would represent revenue on which the Trustee would be required to pay goods and services tax (GST) at the rate of 10 per cent. The Trustee would charge this amount to the Fund. Although the Fund could claim an input tax credit in respect of the amount paid, this would be at the reduced input tax credit rate of 55 per cent of the GST paid by the Fund to the Trustee. There would therefore be a net loss of 4.5 per cent of the Risk Fee paid by the Fund to the Trustee.
The combined loss in respect of income tax and GST would represent 19.5 per cent of the Risk Fee paid by the Fund to AusSuper. This would entail that effectively the Trustee would need to charge the Fund $124.22 to obtain $100 in the Risk Reserve net of taxation.
If the Trustee were to repatriate an amount from the Risk Reserve back to the Fund, there is a risk that this would trigger a CGT event for the Fund, giving rise to income tax being payable by the Fund at the rate of 15 per cent of the amount repatriated as a capital gain because the Fund would have no CGT cost base.
Legality of the proposed amendment
Mr McMillan contends that, if the proposed amendment were made, it would be rendered void by subsections 56(2) and 57(2) of the Supervision Act. The Trustee and APRA take issue with that contention.
If the proposed amendment were rendered void by subsections 56(2) and 57(2) of the Supervision Act, it would be inappropriate to exercise the power conferred by section 59C of the Trustee Act. It is therefore necessary to determine the proper construction of subsection 56(2) of the Supervision Act. It is common ground that the same construction should be given in this respect to subsection 57(2) as is given to subsection 56(2). I therefore address subsection 56(2) (albeit that it has to be construed in the context of subsection 57(2) amongst other provisions of the Supervision Act).
Construction of sections 56(2) and 57(2)
Section 56, as amended with effect from 1 January 2022 will provide:
56 Indemnification of trustee from assets of entity
(1)Subject to subsections (2) and (2A), a provision in the governing rules of a superannuation entity is void if:
(a)     it purports to preclude a trustee of the entity from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee of the entity; or
(b)     it limits the amount of such an indemnity.
(2)A provision in the governing rules of a superannuation entity is void in so far as it would have the effect of exempting a trustee of the entity from, or indemnifying a trustee of the entity against:
(a)     liability for breach of trust if the trustee:
(i)fails to act honestly in a matter concerning the entity; or
(ii)intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the trustee was required to exercise; or
(b)     liability for an amount of a criminal, civil or administrative penalty incurred by the trustee of the entity in relation to a contravention of a law of the Commonwealth (including this Act); or
(c)     the payment of any amount payable under an infringement notice (however described) given under a law of the Commonwealth (including this Act); or
(d)     liability for the costs of undertaking a course of education in compliance with an education direction (within the meaning of this Act).
(2A)A provision in the governing rules of a registrable superannuation entity is void in so far as it would have the effect of allowing a trustee of the entity:
(a)     to indemnify itself out of the assets of the entity for any amount expended out of capital of the trustee managed and maintained by the trustee to cover the operational risk of the entity; or
(b)     to indemnify itself out of any assets of the entity that do not form part of a reserve maintained for the purpose of covering the operational risk relating to the entity, any amount that relates to that risk, without first exhausting the reserve and any other financial resources managed and maintained by the trustee to cover the risk.
(3)Nothing in the governing rules of a superannuation entity prohibits a trustee of the entity from seeking advice from any person in respect of any matter relating to performance of the duties or the exercise of the powers of a trustee. A provision in the governing rules that purports to preclude a trustee of the entity from being indemnified out of assets of the entity in respect of the cost of obtaining such advice, or to limit the amount of such an indemnity, is void.
Section 10 of the Supervision Act defines “superannuation entity”, “trustee” and “governing rules” as follows:
governing rules, in relation to a fund, scheme or trust, means:
(a)any rules contained in a trust instrument, other document or legislation, or combination of them; or
(b)any unwritten rules;
governing the establishment or operation of the fund, scheme or trust.
superannuation entity means:
(a)a regulated superannuation fund; or
(b)an approved deposit fund; or
(c)a pooled superannuation trust.
trustee, in relation to a fund, scheme or trust, means:
(a)if there is a trustee (within the ordinary meaning of that expression) of the fund, scheme or trust--the trustee; or
(b)in any other case--the person who manages the fund, scheme or trust.
Not all superannuation funds are superannuation entities. The Fund is a superannuation entity. Section 19 defines a superannuation entity effectively to mean a superannuation fund:
·that has a corporate trustee (or a trustee of any type and the sole or primary purpose of the fund is the provision of old-age pensions); and
·whose trustee has elected (by notice to the Commissioner of Taxation) that the Supervision Act apply in relation to the fund.
The Trustee and APRA contend that section 56 refers to “indemnifying” in its legal sense (as articulated in Lane v Deputy Commissioner of Taxation[32] and Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia[33]) of being held harmless from liabilities incurred. They contend that the reference in subsection 56(2) to the “effect of indemnifying” ensures that attention is to be given to the substantive operation or effect of the relevant provision rather than confining the application of the subsection to provisions expressed to indemnify or be indemnities but it does not extend the application of the subsection to a provision that does not have the effect of an indemnity in its legal sense.
[32] (2017) 253 FCR 46.
[33] [2019] HCA 20, (2019) 268 CLR 524.
Mr McMillan contends that section 56 refers to “indemnifying” in a broader sense than its legal sense and further the reference in subsection 56(2) to the “effect of indemnifying” expands the application of subsection 56(2) to a provision that has the effect of assets of the fund being applied directly or indirectly to meet a liability incurred by the trustee referred to in paragraph (a) or a liability for a penalty referred to in paragraph (b), (c) or (d) of subsection 56(2) (a non‑indemnifiable penalty).
Starting with the text of subsection 56(2), the subject matter of the subsection is the governing rules of a superannuation entity. The subsection operates by rendering void a provision of the governing rules insofar as it would have one of the defined exemption or indemnification effects. It does not address indemnification as such and does not negate any indemnification that might arise otherwise than by virtue of a provision of the governing rules. In this respect, it operates in the same manner as subsections (1) and (3), which operate by rendering void a provision of the governing rules insofar as it precludes or limits indemnification of the trustee out of the assets of the trust in respect of a liability incurred while acting as trustee or in respect of the cost of advice concerning the trustee’s powers or duties: they do not create any right of indemnification.
The reference in the chapeau of subsection (2) to exemption is apposite to liability for breach of trust the subject of paragraph (a) because, under the general law, a trustee is liable to the trust for any loss caused by breach of trust unless the governing rules provide otherwise. Indemnification is not particularly apposite to liability for breach of trust because there will usually be no third party to whom the trustee will be liable in respect of which the trustee could be indemnified out of trust assets or by the beneficiaries of the trust. Although technically it is possible that a trustee might be sued by an individual beneficiary and might be indemnified out of trust assets in respect of that liability, paragraph (a) naturally calls up, at least in the paradigm case, the concept of exemption rather than indemnification.

Conversely, the reference in the chapeau of subsection (2) to indemnification is apposite to liability for a penalty the subject of paragraphs (b) and (c) because the liability will be to a third party, namely the Commonwealth (or one of its instrumentalities). Exemption is not particularly apposite to such liabilities because they are not liabilities to the trust or the beneficiaries in respect of which the trustee might be exempted. Although technically it might be said that a trustee could be exempted from liability to the trust for breach of the trustee’s obligations to the trust giving rise to the relevant liability to the Commonwealth, paragraphs (b) and (c) naturally call up, at least in the paradigm case, the concept of indemnification rather than exemption. The same applies to paragraph (d) in respect of liability for the costs of undertaking a course of education in compliance with an education direction.
Accordingly, although not entirely mutually exclusive, principally subsection (2) addresses:
·exemption from liability to the trust and beneficiaries in respect of breach of trust the subject of paragraph (a); and
·indemnification against liabilities of the Commonwealth out of trust assets or by the beneficiaries in respect of liabilities the subject of paragraphs (b), (c) and (d),
and the references to exemption and indemnification should largely be read distributively as between paragraph (a) and paragraphs (b) to (d) respectively.
Subsection (2) is not limited to indemnification of a trustee out of trust assets. As observed by Derrington J in Lane v Deputy Commissioner of Taxation,[34] under the general law “a trustee is also entitled to a personal indemnity from the beneficiaries who are all sui juris and absolutely entitled to the trust assets in relation to all debts and liabilities properly incurred in the performance of the trust”. I refer for convenience to beneficiaries who are sui juris and absolutely entitled to trust assets as absolute beneficiaries.
[34] [2017] FCA 953, (2017) 253 FCR 46 at [34].
Subsection (2) is not limited to rendering void a provision of the governing rules that indemnifies the trustee against liability for a penalty the subject of paragraphs (b), (c) and (d). It extends to a provision that has that effect.
Although the whole of the text and context of subsection (2) must be considered, the critical concepts are indemnification and effect of indemnification.
In Lane v Deputy Commissioner of Taxation,[35] Derrington J referred to the indemnities to which a trustee is entitled under the general law and to such indemnification (whether out of the assets of the trust or by absolute beneficiaries) being effected either by a right of recoupment (where the trustee first discharges the trust liability and then is reimbursed out of trust assets or by absolute beneficiaries) or a right of exoneration (where the trustee applies trust assets or monies received from absolute beneficiaries directly to discharge the trust liability):
It is apt to keep in mind in the consideration of the authorities that the rights of exoneration and recoupment from the trust assets which are considered in this matter, are only part of the protection afforded to a trustee in relation to liabilities not-improperly incurred in the performance of a trust. For example, in the absence of contrary provisions in the trust instrument, a trustee is also entitled to a personal indemnity from the beneficiaries who are all sui juris and absolutely entitled to the trust assets in relation to all debts and liabilities incurred in the performance of the trust … The essential point is that the trustee has a number of rights which are inherent to their position and which operate to hold them harmless from liabilities incurred in the fulfilment of their duties…
As the trustee is personally liable for the debts incurred in the conduct of a trust, it is a necessary incident of the office of trustee that they have an entitlement to indemnity out of the trust assets for all charges, expenses and liabilities appropriately incurred.
…
…the right of a trustee to be indemnified from the assets of the trust falls into two distinct parts. First, where a trustee has discharged a trust debt out of their own funds, the trustee is entitled to reimbursement out of the trust funds in an equivalent amount. That occurs by money being transferred from the trust funds to the trustee who receives an absolute, beneficial interest in that money. That right in relation to satisfied trust liabilities is often referred to as the right of “recoupment”. Second, the trustee is entitled to meet unsatisfied trust debts directly from the trust assets by utilising the right of “exoneration”. Pursuant to this right, the trustee directly applies trust assets to discharge the indebtedness by paying trust funds directly to the trust creditor.
…
…the duality of the right of indemnity from trust assets reflects a similar attribute in the right of indemnity which the trustee has as against the beneficiary. In the latter case, a trustee is entitled to discharge the trust liabilities by use of their own funds and then seek to be reimbursed by the beneficiary, or obtain an order in equity requiring the beneficiary to pay the creditor once the debt falls due…[36]
[35] (2017) 253 FCR 46.
[36] At [34], [35], [36] and [39].
In Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia,[37] the High Court addressed a trustee’s right of indemnity. Kiefel CJ, Keane and Edelman JJ said:
[37] [2019] HCA 20, (2019) 268 CLR 524.
Whether sourced in statute, or as an express term or equitable implication in the trust instrument, the trustee has two rights to obtain indemnity. In Chief Commissioner of Stamp Duties (NSW) v Buckle, this Court approved the following passage from Scott on Trusts, which described the general characteristics of the two rights of indemnity:
"Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration."
Although both of these rights of indemnity might strictly be described as powers of indemnity, their description as "rights" emphasises that they do not exist independently of the rights that the trustee holds on trust.
…
The power of exoneration, like that of reimbursement, has been described as conferring upon the trustee "a proprietary interest" in the trust assets. These labels, "trust assets" and the trustee's "proprietary interest", describe the combination and effect of the legal and equitable rights which the trustee holds on trust. Hence, where a trustee has legal title, as well as equitable or statutory powers of indemnity that are concerned with ways in which the legal title can be used, the legal title is not independent of those powers of indemnity. The legal title held by the trustee has thus been described as subject to an equitable charge or lien in favour of the trustee to secure the powers of indemnity. As this Court explained in Chief Commissioner of Stamp Duties (NSW) v Buckle, the "trust assets" are subject to competing "proprietary rights, in order of priority, of the trustee and the beneficiaries". The trustee's rights take priority over those of the beneficiaries to the extent of the trustee's powers of indemnity.[38]
Bell, Gageler and Nettle JJ said:
As was stated by the plurality in Octavo Investments Pty Ltd v Knight, although a trustee who enters into business transactions as trustee is personally liable for debts incurred in the course of those transactions, the trustee is entitled to be indemnified (whether by recoupment or exoneration) out of the trust assets against such liabilities, and thus enjoys a beneficial interest in those assets. The corollary, as was stated unanimously in Chief Commissioner of Stamp Duties (NSW) v Buckle, is that the trustee does not hold the trust assets solely for the benefit of the beneficiaries to the extent of that right of indemnity.
The trustee also has a right to be indemnified out of the trust assets in respect of liabilities properly incurred in the execution of the trust, which takes priority over the beneficiaries' claim on the trust assets. Until that right has been satisfied, the beneficiaries cannot compel the trustee to exercise the trustee's powers as legal owner of the trust assets for their benefit. A court of equity will assist the trustee to realise trust assets to satisfy the trustee's right of indemnity, in priority to the beneficiaries' interests, and thus it is said that the trustee has an equitable charge or lien over the trust assets. It is not, however, a charge or lien comparable to a synallagmatic security interest over property of another. It arises endogenously as an incident of the office of trustee in respect of the trust assets.[39]
Gordon J said:
Where a trustee acting within its powers incurs a debt in the course of the administration of the trust, although the trustee is ordinarily personally liable in relation to the debt, it is entitled to indemnity out of the trust estate. If the trustee has discharged the liability out of its individual property, it is entitled to reimbursement; if it has not discharged the liability, it is entitled to apply the trust property in discharging it. That is, the trustee is entitled to exoneration...
…
The trustee has an equitable charge or lien on trust property, which gives the trustee a right to retain trust property until the right of indemnity is satisfied and, if necessary, to sell that property. The scope of the trustee's indemnity (whether exoneration or recoupment) is confined to expenses which are "properly" or "reasonably" incurred.[40]
[38] At [29], [30] and [32]. (Footnotes omitted)
[39] At [80] and [83]. (Footnotes omitted)
[40] At [130] and [132].
The Oxford English Dictionary[41] defines the verb “indemnify” in the following terms:
[41] The English Oxford Dictionary, 2nd edition (1989).
indemnify, v.
1.trans. To preserve, protect, or keep free from, secure against (any hurt, harm or loss); to secure against legal responsibility for past or future actions or events; to give an indemnity to.
2.
a. To compensate (a person, etc.) for loss suffered, expenses incurred, etc.
b. To compensate for disadvantages, annoyances, hardships, etc.
3.To compensate, make up for. Obsolete rare
Hence, indemnified, indemnifying ppl. adjs
The Macquarie Australian Dictionary[42] defines the verb “indemnify” in the following terms:
indemnify v.t. (indemnified, indemnifying)
1.to compensate for damage or loss sustained, expenses incurred, etc.
2.to engage to make good or secure against anticipated loss; give security against (future damage or liability).
[42] Macquarie Dictionary, 7th edition (2000).
Parliament chose to use the word “indemnifying” which has a clearly established legal meaning as articulated in Lane v Deputy Commissioner of Taxation and Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia of being held harmless from liabilities incurred. Parliament chose to use the phrase “effect of indemnifying” to focus attention on the substantive effect of the relevant provision rather than its technical form or the use of words such as indemnify or indemnity in the provision. The reference to “effect” does not expand the concept of indemnifying; rather it directs attention to the question whether the provision has the effect of an indemnity in the legal sense regardless of its precise wording.
Turning to the immediate context of subsection (2) in section 56 as a whole, as observed above, each of subsections (1) and (3) render void a provision of the governing rules insofar as it precludes or limits indemnification of the trustee out of the assets of the trust in respect of a liability incurred while acting as trustee or the cost of advice concerning the trustee’s powers or duties: they proceed on the premise that the general law creates a right of indemnity in favour of a trustee against such liabilities or costs. It would be incongruous if subsections (1) and (3) referred to indemnity in its legal sense and subsection (2) (and subsection (2A)) referred to indemnity in a broader sense. This is especially so in circumstances in which subsection (1) is expressed to be subject to subsections (2) and (2A): these three subsections must necessarily operate in conjunction and in harmony.
Turning to the context of section 56 in Part 6 of the Supervision Act, section 57 is the counterpart of section 56 applying to directors of a trustee as opposed to the trustee itself. Part 6 is entitled “Provisions relating to governing rules of superannuation entities”. Section 51 provides that “The object of this Part is to set out rules about the content of the governing rules of superannuation entities”. Subsections 52(1) and 52A(1) provide that “If the governing rules of a registrable superannuation entity [in subsection 52A(1) – of which a trustee is a body corporate] do not contain covenants to the effect of the covenants set out in [the section], those governing rules are taken to contain covenants to that effect”. Subsections 52(2), 52(6) to (9), (13), (14) and 52A(2) set out a series of covenants, such as obligations by the trustee and directors of a corporate trustee to act honestly, with care skill and diligence and in the best financial interests of the beneficiaries. The reference to the “effect” of the governing rules supports the construction of the reference to effect in subsection 56(2) referred to above.
Turning to the broader context of section 56 in the context of the Supervision Act as a whole, as observed above in general terms the Act does not limit the amount of fees that can be charged by a trustee. The Act does not preclude commercial trustees from charging fees to generate a profit. This renders it less likely that Parliament intended by subsection 56(2) to preclude provision in the governing rules for payment of a fee to the trustee that might be used in the hands of the trustee to discharge a liability or penalty referred to in paragraph (a), (b), (c) or (d) of subsection 56(2). Indeed, if it had been Parliament’s intention to preclude payment of such a fee, it may be expected that subsection (2) would have been expressed in quite different terms and would have expressly precluded the charging of such a fee or at least rendered void a provision in the governing rules providing for the charging of such a fee. The Act also does not preclude a trustee paying out of the fund premiums for insurance against liabilities of the trustee.
Turning to the historical context of section 56, when first enacted in 1993 subsection (2) contained the same structure but contained only paragraph (a) (the wording of which has not been amended) and a paragraph (b) referring to a liability for a penalty under a civil penalty order on contravention of one of the defined provisions of the Supervision Act. The Explanatory Memorandum does not assist in relation to the relevant construction of subsection 56(2).[43]
[43] See clause [88] extracted in Re HEST Australia Ltd [2021] VSC 809 at [24] per Button J.
In 2013 a new paragraph (c) was inserted[44] in subsection 56(2) referring to “the payment of any amount payable under an infringement notice”, which amendment was made at the same time as the insertion of Part 22 providing for infringement notices to be issued by APRA in respect of contraventions of defined provisions of the Supervision Act. The Explanatory Memorandum provides limited assistance in the construction of subsection 56(2).[45]
[44] By the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Act 2013.
[45] See clauses 2.28 to 2.30 extracted in Re HEST Australia Ltd [2021] VSC 809 at [25] per Button J.
In 2014 new paragraphs (d) and (e) were inserted[46] in subsection 56(2) referring to a “liability for the costs of undertaking a course of education in compliance with an education direction” and a “liability for an administrative penalty imposed by section 166” respectively, which amendments were made at the same time as the insertion of Part 20 providing for education directions to be given by APRA and administrative penalties to be imposed in respect of contraventions of the Supervision Act in relation to self managed superannuation funds. The Explanatory Memorandum provides limited assistance in the construction of subsection 56(2).[47]
[46] By the Tax and Superannuation Laws Amendment (2014 Measures No. 1) Act 2014.
[47] See clauses 2.93 and 2.94.
With effect on 1 January 2022 subsection 56(2) will be effectively repealed and a new subsection 56(2) enacted[48] as set out at [87] above. The Explanatory Memorandum provides limited assistance in the construction of subsection 56(2).[49]
[48] By the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) Schedule 9 items 63 and 64.
[49] See clauses 9.164 to 9.168.
The explanatory memoranda in respect of the 2013, 2014 and 2020 amendments refer to the purpose of the amended provisions being to prevent trustees and directors using trust assets or fund monies to pay the relevant penalty.[50] This is ambiguous but tends to suggest that the mischief is the payment of a penalty out of fund monies as opposed to the charging by the trustee of a fee to the fund which monies might be used, in the hands of the trustee, to pay a penalty.
[50] See clause 1.29 of the 2013 Explanatory Memorandum, clauses 2.93 and 2.94 of the 2014 Explanatory Memorandum and clauses 9.165 and 9.166 of the 2020 Explanatory Memorandum.
Turning to the evident purpose of subsection 56(2), a provision of the governing rules of a superannuation fund empowering the trustee to discharge a paragraph (a), (b), (c) or (d) liability or penalty out of fund assets or reimburse itself out of fund assets in respect of its own discharge of the liability or penalty would render the fund liable for an unlimited and indeterminate amount. Members of the fund could have no certainty about the value of their superannuation investment in the fund or ultimate benefit because it would be liable to be depleted in this way. The evident purpose of subsection 56(2) is to prevent this occurring. By contrast, the charging by the trustee of a specific fee would not render the fund liable to such unlimited and indeterminate depletion.
When the legislature enacted the new subsection 56(2) by the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth), it was self‑evidently aware of the report of the Hayne Royal Commission. That report referred to a dichotomy between retail funds (what I have called commercially operated funds) on the one hand and industry or other profit for member funds (what I have called cooperative funds) on the other. It is apparent that the interests of members of cooperative funds would be detrimentally affected if their trustees were not able to accumulate capital to meet liabilities referred to in subsection 56(2) and were to become insolvent as a result of the imposition of such a liability. The Supervision Act does not provide any mechanism for such trustees to accumulate capital other than by way of charging fees to the fund. This suggests that it was not the evident purpose of the enactment of the new subsection 56(2) to preclude the governing rules providing for the charging of a fee to accumulate capital in the trustee.
In Re QSuper Board[51] Kelly J adopted a similar construction, saying:
Section 56(2) is directed to provisions in the governing rules of a superannuation entity which would have the effect of “exempting a trustee … from” or “indemnifying a trustee … against” certain liabilities. ... The concern of this type of provision is what might be described as “blank cheque indemnification and exemption”. These features are not apparent in the Proposed Amendment. The statutory provision also uses technical language, namely “exempting” and “indemnifying”, which is apt to apply to liabilities which have arisen, as distinct from possible, prospective liabilities. In my consideration, the levying of a fee, which is meant to build up over time into an asset that may be deployed by the trustee in the event that it becomes subject to a liability against which it cannot be indemnified, does not have the substantive effect of conferring an exemption from or indemnifying against that liability. Notably, the fee charged may prove to be insufficient, or excessive, to cover the extent of the liability and does not have the effect of excusing or extinguishing the liability of the trustee.[52]
[51] [2021] QSC 276.
[52] At [32]. (Footnotes omitted)

In AusSuper’s product disclosure statements, under the heading “You come first”, it says that “as a profit-for-member super fund, we act in your best interests and not the interest of shareholders”.
In a financial sense, leaving aside the nominal share capital of its shareholders, AusSuper has been and is exclusively developed and paid for by the Fund and in a commercial sense as a licensed corporate trustee, the company is an asset of the Fund (albeit not recognised in an accounting sense). Subject to being permitted by the Commonwealth’s regulatory regime, it would be appropriate that the moneys necessary to be paid to AusSuper to immunise it against insolvency at the cost of and for the benefit of the Fund be paid and recognised as share capital.
Under the proposed risk fee, Fund members will effectively bear the income tax differential of 15 per cent and the GST differential of 4.5 per cent. If the Fund were to contribute share capital through the issue of shares by AusSuper beneficially to the Fund, thereby reflecting the commercial relationship between the Fund and AusSuper, it would bear no income tax payable in the hands of AusSuper, which would be appropriate because AusSuper would be receiving share capital and not income. There would be no GST payable, which would be appropriate because GST is not payable on the issue of company shares. Further, if AusSuper were to repatriate to the Fund any money standing to the credit of the Risk Reserve to the Fund, this would simply be a return of share capital.
There is presently a Commonwealth regulatory impediment to the issue of shares by AusSuper beneficially to the Fund. Subregulation 13.17A(1) of the Superannuation Regulations provides:
13.17A Public offer superannuation funds--restrictions on loans and investments
(1)For subsection 31(1) of the Act, it is a standard applicable to the operation of public offer superannuation funds that, except so far as permitted by subregulation (2), a trustee of a fund must not, in that capacity, invest in:
(a) the trustee itself; or
(b) a related body corporate.
Subregulation 13.17A(2) does not provide any relevant exception. Subregulation 13.17A(1) therefore prevents AusSuper from issuing shares in itself to itself or any other entity as trustee for the Fund. The Commonwealth could amend subregulation (2) to provide an additional exception that would permit a cooperative fund to invest in its corporate trustee.
Subject to amendment of subregulation 13.17A, there are at least three vehicles that could be used for a cooperative fund to invest in its corporate trustee:
1the corporate trustee could issue shares to itself as trustee of the fund;
2the corporate trustee could incorporate a new company to act as custodian, or enter into an arrangement with an existing custodian, for shares to be issued by the corporate trustee to the custodian on behalf of the fund; or
3a new holding company could be incorporated, the trustee company could issue shares to the holding company and the corporate trustee acting as trustee of the fund could then acquire newly issued shares in the holding company.
The first vehicle is the simplest and probably the preferable vehicle. Section 259A of the Corporations Act provides:
259A Directly acquiring own shares
A company must not acquire shares (or units of shares) in itself except:
(a)in buying back shares under section 257A; or
(b)in acquiring an interest (other than a legal interest) in fully-paid shares in the company if no consideration is given for the acquisition by the company or an entity it controls; or
(c)under a court order; or
(d)in circumstances covered by subsection 259B(2) or (3).
A trustee company could seek a court order under section 259A(c) on the ground that it would not be acquiring the beneficial interest in the shares in itself and hence the transaction would not be contrary to the policy reflected in the section. Alternatively (and preferably) the Commonwealth could amend the Supervision Act to provide an exception to section 259A in respect of shares issued by a trustee of a regulated superannuation fund in its capacity as trustee of that fund.
The second vehicle is more complex because it would require the interposition of another entity (the custodian) to hold the shares in the corporate trustee on behalf of the fund. Section 123 of the Supervision Act requires a custodian to have net tangible assets and/or an approved guarantee totalling an amount prescribed by regulations. The amount prescribed by regulation 13.19 is $5 million. This vehicle would require either an internal custodian to be capitalised to $5 million or the use of an external custodian (which would be likely to charge fees) with the requisite capitalisation. If for some reason this vehicle were preferred over the first vehicle, it would be desirable that the Supervision Act or the Regulations be amended to facilitate the use of an internal custodian without requiring such capitalisation.
The third vehicle is yet more complex. Section 259C of the Corporations Act provides:
259C Issuing or transferring shares to controlled entity
(1)The issue or transfer of shares (or units of shares) of a company to an entity it controls is void unless:
(a)     the issue or transfer is to the entity as a personal representative; or
(b)     the issue or transfer is to the entity as trustee and neither the company nor any entity it controls has a beneficial interest in the trust, other than a beneficial interest that satisfies these conditions:
(i)the interest arises from a security given for the purposes of a transaction entered into in the ordinary course of business in connection with providing finance; and
(ii)that transaction was not entered into with an associate of the company or an entity it controls; or
(c)     the issue to the entity is made as a result of an offer to all the members of the company who hold shares of the class being issued and is made on a basis that does not discriminate unfairly, either directly or indirectly, in favour of the entity; or
(d)     the transfer to the entity is by a wholly-owned subsidiary of a body corporate and the entity is also a wholly-owned subsidiary of that body corporate.
(2)ASIC may exempt a company from the operation of this section. The exemption:
(a)     must be in writing; and
(b)    may be granted subject to conditions.
(3)If paragraph (1)(c) or (d) applies to an issue or transfer of shares (or units of shares), section 259D applies.
The third vehicle appears to fall within the exception created by section 259C(1)(b) and otherwise the transaction would require an exemption from ASIC.
As Commonwealth legislation and regulations intended to increase protection is actually detrimental to the interests of members of superannuation funds, it is highly desirable that the Commonwealth reviews its legislation and regulations in the manner suggested in the interests of members of cooperative superannuation funds.
In the meantime, it is not legally possible for the Fund to provide share capital to AusSuper to mitigate the risk of insolvency if a non-indemnifiable penalty is imposed.
Conclusion
AusSuper cannot obtain ordinary insurance that sufficiently mitigates against the risk of insolvency if a non-indemnifiable penalty is imposed. It is not known whether a captive insurance arrangement could provide sufficient mitigation but in any event it is not possible for AusSuper to enter into an arrangement in sufficient time to mitigate the risk by 1 January 2022. It is not presently legally possible for the Fund to acquire shares in AusSuper.
Accordingly, there is good reason to vary the Trust Deed and it would be in the best interests of beneficiaries to vary the Trust Deed to empower the Trustee to charge a risk fee (subject to quantum and terms).
Fairness between beneficiaries
The next prerequisite to making a variation order under section 59C of the Trustee Act is that the variation will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class.
Sections 52(2)(e) and (f) of the Supervision Act import into the Trust Deed a covenant by the Trustee to act fairly in dealing with classes of beneficiaries within the entity and in dealing with beneficiaries within a class (the fair dealing covenants). It would not be appropriate to exercise the variation power conferred by section 59C if an amendment by the Trustee to the same effect would be in contravention of the fair dealing covenants. However, as section 59C requires the Court to be satisfied that the proposed variation will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class, it is not necessary to give separate consideration to the fair dealing covenants.
The Administration Reserve as at 30 June 2021 had a balance of $108 million. It is the intention of the Trustee that the proposed Risk Fee be paid out of the Administration Reserve. That Reserve has been built up predominantly by administration fees charged over the past few years, which predominantly have been charged at a flat rate of $2.25 per week.
Proposed rule 4A does not identify the source within the Fund of payment of the Risk Fee or the method by which it will effectively be borne by members. Consequently, if a variation order is made to insert rule 4A into the Trust Deed, the Trustee will have an ongoing obligation, pursuant to the fair dealing covenants, to act fairly in dealing with classes of beneficiaries and beneficiaries within a class.
In broad terms, the proposed Risk Fee could be effectively borne by members equally (a flat fee) or proportionately to their account balance (a percentage fee) or a combination of these methods. Indeed, section 29VA of the Supervision Act requires that fees charged to MySuper members be charged on one of these three bases and that it be the same basis and charge for all MySuper members.
Considered at the abstract level, in principle it might be preferable that the Risk Fee be borne as between members in a manner that is proportionate to their account balances because the detriment to a member (summarised above) if the Trustee does not have capital available to meet a non-indemnifiable penalty and becomes insolvent is likely to be proportionate to the members’ investments in the Fund. However, this is not an absolute proposition and some component of the detriment might be suffered by a member regardless of account balance.
If the Risk Fee is paid out of the Administration Reserve, in an indirect sense it will be borne by members predominantly on an equal basis because predominantly (but not exclusively) the administration fee that has funded the balance in the Administration Reserve is and has been charged as a flat fee.
A major reason for AusSuper proposing to pay the Risk Fee out of the Administration Reserve is that it will not entail the charging to members of any new or increased fee and will not affect the existing account balances of members. Some of the contributions to the current balance of the Administration Reserve have been made by persons who are no longer members and, in the absence of the introduction of any form of Risk Fee, no amount in the Administration Reserve would otherwise be paid out to such persons. In addition, in the absence of the introduction of any form of Risk Fee, it is unlikely that the balance in the Administration Reserve would be paid out to current members.
Mr McMillan, as representative of the actual and potential beneficiaries, supports payment of the Risk Fee (if, contrary to his opposition, one is to be introduced) out of the Administration Reserve rather than a new or increased fee being charged to members.
APRA has not adopted any policy position as to the manner in which a fee charged for the purpose of building financial resilience should be borne as between members, and in particular whether it should be a flat fee, a percentage fee or a combination. APRA does not submit that it is inappropriate in the present case for the Risk Fee (if one is to be introduced) to be paid out of the Administration Reserve.
I am satisfied that, if the Risk Fee were to be paid out of the Administration Reserve, it would not be in contravention of section 29VA of the Supervision Act. Assuming (without deciding) that, on the proper construction of section 29VA, a fee paid out of an administration reserve would be required to comply with the charging rules contained in the subsections of section 29VA, there would be compliance with that section because the Administration Reserve itself has been funded by an administration fee that is a combination of a flat fee and a proportionate fee in compliance with subsection 29VA(4).
I am satisfied that the variation order under section 59C of the Trustee Act proposed to be made will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class, having regard to the above considerations. However, the potential for change, including the potential that APRA might issue potential standards addressing the manner in which a fee charged for the purpose of building financial resilience should be borne as between members is an additional reason why the terms of a variation should be limited in addition to the reasons given at [204] to [208] below.
Preserving spirit and minimising disturbance
The next prerequisites are that the variation accords as far as reasonably practicable with the spirit of the trust and will not disturb the trust beyond what is necessary to give effect to the reasons for the variation. These two prerequisites can be considered in conjunction.
I accept that the original spirit of the Fund was that the Trustee would act gratuitously and would not charge fees to the Fund. For the reasons given above, it is necessary to depart from the original spirit of the Trust and the reference in section 59C to according “as far as reasonably practicable” with the spirit of the trust recognises that a variation will often entail some departure from the spirit of the trust.
The proposed amendment would not introduce any profit fee being charged by the Trustee to the Fund. It is necessary in the interests of the beneficiaries to vary the Trust to allow the charging of a risk fee.
These two prerequisites are addressed by having regard to the quantum of the proposed fee and the terms of the variation addressed below.
Not tax motivated
The final prerequisite is that the application is not substantially motivated by a desire to avoid or reduce the incidence of tax.
This prerequisite is clearly established. There is no suggestion of tax minimisation.
Quantum of Risk Fee
Annual fee and monetary ceiling
The proposed quantum of the Risk Fee is 0.015 per cent per annum of the net assets of the Fund subject to the monetary ceiling of 0.045 per cent of the net assets of the Fund (subject to a higher regulatory ceiling), in each case calculated as at the end of the previous financial year. Based on net assets of the Fund at 30 June 2021 of $233 billion, this equates to an initial annual Risk Fee of $35 million per annum and monetary ceiling of $105 million.
Mr McMillan submits that the proposed annual fee and ceilings are too high. He does not contend that the annual fee should be a fixed dollar amount subject to indexed adjustments as opposed to a percentage of net assets (albeit the percentage is based on underlying monetary calculations). I accept that over the longer term a fixed dollar amount subject to indexed adjustments would be inappropriate because it is likely that the Fund will continue to grow in size at a faster rate than an index such as the consumer price index or average weekly earnings and the quantum of the financial risks to the Trustee is likely to be related (albeit not directly proportional) to the size of the Fund.
As summarised at [72] and following above, AusSuper based the proposed percentage on an analysis by its personnel in relation to approximately 600 legislative provisions that impose a Commonwealth penalty. For each legislative provision, they assigned a breach probability ranging from two per cent to 20 per cent, an enforcement probability, and assumed penalty levels of 25 per cent, 50 per cent and 75 per cent of the maximum penalty.
On the one hand, I accept Mr McMillan’s submission that this analysis is exceedingly pessimistic. Given AusSuper’s past record of no penalties at all having been imposed on it over the last 35 years (aside from small late lodgement penalties) and its strong risk management policies and practices, the breach probabilities assigned are extremely unlikely to be reflected in actual experience in the imminent future. Further, given the vast number of Commonwealth legislative provisions capable of giving rise to a penalty, it becomes artificial to assess the probability of a contravention of each provision and then effectively multiply the average breach probability and penalty by 600 (especially given that many provisions, such as those contained in the Corporations Act and the ASIC Act are in the alternative to each other). The regulators are likely to exercise their prosecutorial discretion in a more favourable manner than estimated by AusSuper. The assessment of penalty levels is also extremely pessimistic. I observe that the analysis by AusSuper’s personnel is virtually entirely theoretical because the lack of previous imposition of penalties on AusSuper or other trustees of cooperative funds means that there is no empirical data.
On the other hand, given the lack of empirical data, it is difficult to make an alternative assessment of what would be an adequate Risk Fee to provide a sufficient level of assurance against insolvency of the Trustee with its detrimental consequences for the Fund. There is always of course a theoretical (albeit remote) possibility that even the risk fee proposed by AusSuper would prove insufficient to avoid insolvency in the event of a catastrophic series of contraventions by the Trustee. There is a need to vary the Trust Deed immediately before any useful empirical data can be compiled.
I have regard to the fact that the amount of the proposed Risk Fee for one year is substantially less (approximately one third) than the estimated direct costs and expenses that would be incurred, at the ultimate cost of the members, if AusSuper had no resources with which to pay a penalty and became insolvent, resulting in its replacement by a long term trustee (if one could be found).
AusSuper proposes that there be a monetary ceiling on the Risk Fee such that (subject to the regulatory ceiling) the amount to the credit of the Risk Reserve does not exceed three times the annual cap.
I have concluded that the appropriate course is to vary the Trust Deed to empower the charging of a Risk Fee at 0.015 per cent per annum of the net assets of the Fund but for the time being to limit the monetary ceiling based on a balance in the proposed Risk Reserve of 0.015 per cent of the net assets of the Fund (rather than three times the annual cap as proposed by AusSuper). This will enable AusSuper to charge a Risk Fee over the next 12 months of the amount that it proposes over that period. This will enable the position to be reviewed after 12 months. In the meantime, the experience of AusSuper and of other trustees of superannuation funds will provide some empirical data on the basis of which the quantum of the Risk Fee and monetary ceiling can be assessed somewhat more meaningfully. In addition, the possibility of captive insurance can be explored over that period and it can be ascertained whether the Commonwealth makes any amendments to the regulatory regime (such as those suggested above). AusSuper can in due course exercise a liberty to apply to seek an increase in the monetary ceiling to the amount that it has proposed or otherwise.
Regulatory ceiling

Under AusSuper’s proposal, the regulatory ceiling is expressed in the following terms:
(b)such amount (if any) as the Relevant Requirements require or as a Responsible Authority recommends, requests or directs the Trustee to hold as capital on its own account;
When it applies, the regulatory ceiling increases the limit otherwise imposed by the monetary ceiling on the amount of the Risk Fee by reference to the balance of the Risk Reserve.
The regulatory ceiling is expressed in terms that are too wide. First, it refers to a mere recommendation or request by a Responsible Authority as opposed to a mandatory direction. Apart from the uncertainty associated with determining what amounts to a recommendation or request, a mere recommendation or request should not increase the ceiling.
Secondly, the definition of the Relevant Requirements (extracted at [60] above) is very broad and encompasses not only the Supervision Act and Regulations but also other legislation such as the Income Tax Assessment Act 1936 (Cth), the Income Tax Assessment 1997 (Cth) and any other statute or regulation of the Commonwealth or a State or Territory. If any requirement concerning the capital of the Trustee were to be imposed directly by legislation, it is almost inconceivable that it would imposed by any legislation other than the Supervision Act or Regulations or the licensing requirements of the Corporations Act. Again, references to other legislation (including taxation legislation) may lead to uncertainty and are too broad. The reference in the regulatory ceiling should be confined to the Supervision Act or Regulations or the licensing requirements of the Corporations Act.
Determination of quantum of fee charged
The question whether the Risk Fee charged should be less than 0.015 per cent per annum of the net assets of the Fund subject to the ceilings would be a decision to be made by the Trustee.
I accept that the Trustee and its directors will be in a position of potential conflict of duty and interest because their duty to beneficiaries will be to minimise the amount of the Risk Fee and their interest may be perceived to be to maximise it. In this respect, Mr Schroder gave evidence, which I accept, that the board will give paramountcy to the interests of the beneficiaries and in any event the Fund is in a competitive position with other superannuation fund which will provide some constraint on the amount of the risk fee charged. In addition, the beneficiary paramountcy covenants imputed by sections 52(2)(d)(i) to (iii) and 52A(2)(d) (i) to (iii) of the Supervision Act will require the Trustee and the board to give paramountcy to beneficiary interests in determining the amount of the Risk Fee. Further, the annual cap will provide an explicit restraint on the amount of the Risk Fee. It would be preferable if all conflicts between duty and interest could be avoided but, as sections 52(2)(d)(i) to (iii) and 52A(2)(d) (i) to (iii) of the Supervision Act recognise, some conflicts are inevitable and must be managed in the best manner reasonably practicable by requiring paramountcy to be given to the interests of the beneficiaries.
Terms of the proposed new rule
Mr McMillan raises several issues concerning the terms of the proposed new rule 4A.
Payment out of Risk Reserve
Under AusSuper’s proposal, the question whether an amount standing to the credit of the Risk Reserve in the accounts of AusSuper is to be paid out in discharge of a non-indemnifiable penalty will be a decision to be made by AusSuper and usually by its board of directors.
Mr McMillan submits that it would be more appropriate that that decision be made by a third party trustee comprising representatives of the members of the Fund. He points to the potential conflict of interest of the Trustee in making a decision to discharge its own liability.
I understand and accept the rationale for Mr McMillan’s suggestion. However, there are several difficulties associated with adopting his suggestion. First, it would be necessary to draft a trust deed defining the trust on which the third party would hold the funds. If it were drafted in terms that recognise that the Fund had a prospective interest in the funds, it may result in the application of subsection 56(2) and, if not, it would partly defeat the purpose of using a third party trust. Secondly, it would be a complex process for the members to elect member representatives given that the members of the Fund number over two million. However, more importantly, it is difficult to conceive of circumstances in which a third party trustee would not choose to pay the penalty imposed on the Trustee because it may be expected that the consequences of non-payment will be more detrimental to the members than the consequences of payment. If payment were not made and the Trustee were placed in insolvency administration, it may be that the Commonwealth would pursue the third party trust for payment.
Overall, payment out of the Risk Reserve should be a matter for the Trustee. This accords with its nature.
Penalties imposed on directors
Mr McMillan submits that the Trustee should not be permitted to make payments out of the Risk Reserve in discharge of a penalty imposed on a director as opposed to a penalty imposed on the Trustee itself. AusSuper submits that this restriction should not be imposed.
Mr Silk in his first affidavit, which was also adopted by Mr Schroder, said that AusSuper is concerned that, if the risk of inability to pay a penalty cannot be satisfactorily managed, the retention and attraction of suitably qualified and experienced directors may be problematic.
Objectively assessed, the risk of a penalty being imposed on a director that is not covered by AusSuper’s directors and officers insurance policy and in respect of which AusSuper could legally use the Risk Reserve to pay the penalty is very small.
First, no penalty has ever been imposed on a director of AusSuper, nor does it appear that any penalty has ever been imposed on a director of a trustee of a cooperative fund.
Secondly, if a regulatory authority decided to bring a criminal or civil penalty proceeding or impose or issue an administrative penalty or infringement notice in respect of a cooperative fund, it is inherently much more likely to issue it against the corporate trustee rather than against a director (either instead of or as well as against the corporate trustee). Proceeding against a corporate trustee is likely to serve the regulatory purpose and in addition it will usually be easier to establish a contravention by a trustee (in respect of which there may be no mental element or a more easily established mental element) rather than by a director (where not only the physical elements but also a high level mental element will often have to be established).
Thirdly AusSuper would be precluded in any event from paying a penalty imposed on a director if the liability for the penalty did not arise out of good faith. Subsection 199A(2) of the Corporations Act provides:
(2)A company or a related body corporate must not indemnify a person (whether by agreement or by making a payment and whether directly or through an interposed entity) against any of the following liabilities incurred as an officer or auditor of the company:
(a)     a liability owed to the company or a related body corporate;
(b)     a liability for a pecuniary penalty order under section 1317G or a compensation order under section 961M, 1317H, 1317HA, 1317HB, 1317HC or 1317HE;
(c)     a liability that is owed to someone other than the company or a related body corporate and did not arise out of conduct in good faith.
Fourthly, if AusSuper would not be precluded from paying a penalty, it is likely that the penalty would be covered by AusSuper’s directors and officers insurance policy.
On the one hand, these considerations indicate that the retention and attraction of suitably qualified and experienced directors may not be problematic if payment in discharge of a penalty imposed on a director were precluded. On the other hand, these considerations indicate that there is no real potential that large amounts will be paid out of the Risk Reserve on account of penalties being imposed on directors if that is not precluded.
The considerations are finely balanced. However, as in the case of the proposal for a third party trustee to determine payment out of the Risk Reserve, attempting to impose a constraint on payment of a penalty imposed against a director would involve complexity and potentially attract the application of subsection 56(2). An additional consideration is that the Trustee is already invested with the power and responsibility of managing over $230 billion of members’ funds. It is somewhat incongruous not to trust it with the power and responsibility of managing a Risk Reserve comprising a very small fraction of that amount.
On balance, payment out of the Risk Reserve should be a matter for the Trustee. This accords with its nature.
Constraints on dividends and winding up
Rule 94 of the Constitution of AusSuper provides that the board may issue A or B class shares which confer a right to vote but no right to dividends or ordinary shares that confer no right to vote or to dividends. Rule 112.2 of the Constitution provides that, on a winding up, any surplus must not be paid to the shareholders but must be paid or applied to the Fund or its successor fund. Rule 113 provides that the Constitution may be amended by special resolution of the shareholders but any amendment that alters either dividend rights or rule 112.2 requires a recommendation by the board.
Mr McMillan submits that the limitation on the payment of dividends or distribution of surplus on winding up should be entrenched as a term of the Trust Deed rather than merely being provisions of the Constitution of AusSuper that is subject to change.
I accept Mr McMillan’s submission. Although any amendment to AusSuper’s Constitution would require the concurrence of both ACTU Super Shareholding Pty Ltd and Australian Industry Group, no constraint is imposed by the terms of the Trust Deed. Clause 35 of the Trust Deed empowers the Trustee to amend the Trust Deed but this power of amendment must be exercised in accordance with the Trustee’s fiduciary duties and the covenants imputed by section 52 of the Supervision Act.
Concurrently with the insertion of clause 4A, a clause should be inserted into the Trust Deed at an appropriate point (as part of clause 3 which addresses “The Trustee”) to the effect that the Constitution of the Trustee must require that all shares in the Trustee (other than any shares beneficially owned by the Fund) have no right to a dividend and, on a winding up, any surplus must not be paid to any shareholders (other than in respect of any shares beneficially owned by the Fund) and must (unless paid in respect of any shares beneficially owned by the Fund) be paid to the Trust or a successor fund to the Trust.
Information to members
Proposed rule 4A.5 provides that the Trustee must publish on the Fund’s website or otherwise disclose to members each year the amount of the Risk Fee and the balance of the Risk Reserve.
The Trustee should also be required to publish any net earnings of the Risk Reserve and any payments out of the Risk Reserve. Such a requirement formed part of clause 7.3 which Button J advised that the trustee was justified in inserting into the Health Employees Superannuation Trust Australia Trust Deed in Re HEST Australia Ltd.[81]
[81] [2021] VSC 809.
Proposed rule 4A.5 should provide that the matters required to be published include details of any earnings from the investment of the Risk Reserve and details of any amounts paid out of the Risk Reserve including, in respect of each payment, the date and amount of the payment, the date and amount of the liability subject of the payment, and details of the contravention giving rise to the penalty where applicable.
Discretion
Each of the prerequisites for making a variation order on the terms sought subject to the changes referred to above is satisfied.
As observed above, the Trustee has power to amend the Trust Deed, subject to constraints within and outside the Trust Deed. However, as the proposed amendment involves the charging of a fee by the Trustee to the Fund, it is appropriate that the Court determine whether the Trust Deed should be amended and if so its terms rather than the Trustee (assuming the Trustee would have the power to make this particular amendment, which need not be decided).
It is appropriate to exercise the discretion under section 59C of the Trustee Act to make a variation to the Trust Deed. For the reasons given above, it will be limited as to amount.
Conclusion
Subject to hearing the parties, I propose to make the following orders:
1Pursuant to section 59C of the Trustee Act 1936 (SA), the trust deed dated 13 December 1985 (as amended) (Trust Deed) governing the superannuation fund known as AustralianSuper be varied by inserting:
(a) immediately after rule 3.1(3) a new paragraph (4) as follows:
“(4) has a Constitution that requires that:
(a)all shares in the Trustee (other than any shares beneficially owned by the Fund) have no right to a dividend; and
(b)on a winding up, any surplus must not be paid to any shareholders (other than in respect of any shares beneficially owned by the Fund) and must (unless paid in respect of any shares beneficially owned by the Fund) be paid to the Fund or a successor fund (as defined in the Relevant Requirements) to the Fund.”
(b)immediately after rule 4 a new rule 4A as follows:
“4A Trustee Risk Reserve Fee
4A.1 For each financial year of the Fund commencing with the financial year ending on 30 June 2022, a fee is payable to the Trustee in an amount equal to 0.015% per annum of the net assets of the Fund calculated as at the end of the previous financial year (the "Trustee Risk Reserve Fee").
4A.2 The Trustee Risk Reserve Fee is to be paid in such periodic instalments as are determined by the Trustee from time to time.
4A.3 The Trustee:
(1)must suspend payment of further amounts of the Trustee Risk Reserve Fee if and to the extent and for so long as (but only for so long as), immediately following such payment, the balance of the Trustee Risk Reserve would exceed the greater of:
(a)an amount equal to the Trustee Risk Reserve Fee in respect of that financial year calculated under clause 4A.1; and
(b)such amount (if any) as the Superannuation Industry (Supervision) Act 1993 or regulations made thereunder or licensing provisions of the Corporations Act 2001 or regulations made thereunder require or as a Responsible Authority directs the Trustee to hold as capital on its own account; and
(2)may otherwise determine in its absolute discretion to reduce, waive, suspend or postpone the Trustee Risk Reserve Fee (or any part of it) and, subject to Rule 4A.3(1) to cease such reduction, waiver, suspension or postponement.
4A.4 For the purpose of this Rule 4A, a reference to the "Trustee Risk Reserve" is to the balance of funds held by the Trustee as capital on its own account which is referable to the Trustee Risk Reserve Fee which has been paid from time to time. For the avoidance of doubt, the Trustee Risk Reserve does not form part of the assets of the Fund and (other than as set out in this Rule 4A) is not subject to the terms of this Deed.
4A.5 The Trustee must disclose the following information to members within three months after the end of each financial year:
(1)details of the amount(s) of the Trustee Risk Reserve Fee paid in the previous financial year;
(2)the balance of the Trustee Risk Reserve as at the end of that financial year;
(3)details of any earnings from the investment of the Trustee Risk Reserve; and
(4)details of any amounts paid out of the Trustee Risk Reserve including, in respect of each payment:
(a)the date and amount of the payment;
(b)the date and amount of the liability the subject of the payment; and
(c)details of the contravention giving rise to the penalty comprising the liability where applicable,
by publishing this information on the website of the Fund or by other equivalent technological means of communication.”
2The Applicant’s and the Respondent’s costs of this proceeding are to be met by the Applicant from the assets of the superannuation fund known as AustralianSuper.
3Liberty to apply to any party to further vary the Trust Deed.

Fund Type	Retail	Cooperative	Total
Commercially operated	$689 billion
Industry	$927 billion
Public sector	$584 billion
Corporate	$61 billion
Total	$689 billion	$1,572 billion	$2,261 billion

[2021] SASC 147

24 December 2021