AustralianSuper Pty Ltd v McMillan

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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…

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Details
Case
[2021] SASC 147
Decision Date

CaseChat Overview and Summary

AustralianSuper Pty Ltd sought a declaration and an order under section 59C of the Trustee Act 1936 (SA) that the Court should exercise its discretion to vary the Trust Deed governing the superannuation fund known as AustralianSuper. The proposed variation would permit the payment of a fee, the "Trustee Risk Reserve Fee", to the Trustee by the Fund, with the consent of the Trustee, on the terms set out in the proposed variation. The purpose of the fee is to provide the Trustee with a capital reserve to enable it to meet future non-indemnifiable penalties imposed on it by regulators. The applicant argues that the Trustee would become insolvent if it were to incur a penalty in any significant amount. If the Trustee were to become insolvent, it would be unable to continue as trustee of the Fund. The proposed variation is opposed by the respondent, Mr McMillan, who holds a benefit interest in the Fund. The respondent contends that the proposed variation is contrary to the spirit of the trust. The court was required to determine whether the Court should exercise its discretion to vary the Trust Deed governing the superannuation fund known as AustralianSuper in accordance with the proposal. The court found that it is appropriate to exercise the discretion under section 59C of the Trustee Act to make a variation to the Trust Deed. The court concluded that the 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. The variation will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class. The variation is in the interests of the beneficiaries. The variation is not rendered void by subsections 56(2) and 57(2) of the Superannuation Industry (Supervision) Act 1993 (Cth). Given 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. 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. The court proposes to make the following orders: 1 Pursuant 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.” 2 The 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. 3 Liberty to apply to any party to further vary the Trust Deed.

Orders

Orders of the court

Held:

1 Proper construction of subsections 56(2) and 57(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) considered (at [92]-[113]).

2 The proposed rule would not be rendered void by subsections 56(2) or 57(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) (at [145]).

3 In 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]).

4 A 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]).

5 Given 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]).

6 In 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]).

7 In the circumstances, the variation will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class (at [206]).

8 The 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]).

9 Given 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]).

10 Consideration of the other terms of the proposed new rule (at [212]-[239]).

11 Order to be made varying the trust deed (at [243]).

Background

Background to the litigation

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.BackgroundSuperannuation 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).

Evidence

Evidence Before The Court

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.

Decision

Reasons for decision

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.

Ratio Decidendi

Legal Principle Established

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.