FSR GPS: The Substratum Rule In Superannuation

• Published date: 14 February 2023
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Employment and HR, Financial Services, Corporate and Company Law, Retirement, Superannuation & Pensions, Employee Benefits & Compensation, Executive Remuneration
• Law Firm: Herbert Smith Freehills
• Author: Mr Michael Vrisakis, Maged Girgis, Andrew Bradley, Scott Donald and Tamanna Islam
• topic: Trust Law

It is common for superannuation trustees to seek to amend the governing rules of a superannuation fund. This regularly occurs during fund and product rationalisation activity, successor fund transfers, and new product launches.

The typical formula for assessing whether a trust deed amendment can be made by the trustee will involve:

• examining the amendment power contained in the trust deed and
• ensuring the amendment is consistent with the sole purpose test in accordance with section 62 of the SIS Act, and does not adversely alter any accrued benefits in accordance with SIS Regulation 13.16.

However, there is an additional critical factor in the legal equation that is often overlooked as an intrinsic limitation on the amendment power - preserving the substratum of the trust. Failure to adhere to the substratum rule could result in an unenforceable amendment being made or a resettlement of trust.

This edition of our 'FSR GPS' (Guidelines, Principles and Strategies) series examines the core principles of amending a superannuation trust deed.

An express power of amendment

The starting point for the trustee is to consider the scope of the power to make amendments to the trust deed. An amendment will only be effective if it is made within the scope of the amendment power.

Often there will be a clause contained within the trust deed conferring an express power to make amendments on the trustee. The clause may specify:

• the person with the power of amendment - in the case of a superannuation fund, this is typically the trustee;
• whether the amendment should be effected by deed or resolution;
• whether the amendment can be made retrospectively or only prospectively;
• whether consent needs to be sought (for example, there...