The substratum rule in superannuation

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 may be a right of consent on the part of another party, such as a standard employer-sponsor or life company); and
• any express limitations on the power of amendment.

The trustee must abide by the terms of this clause, as otherwise the amendment is likely to be unenforceable.

The courts have developed several principles to assist with determining the scope of the power of amendment for superannuation funds. Generally, the power of amendment in a trust deed must be construed according to the natural meaning and be given a broad meaning.[1] This is also supported by UK case law, as per Millett J in Re Courage Group’s Pension Schemes:

There are no special rules of construction applicable to a pension scheme; nevertheless, its provisions should wherever possible be construed to give reasonable and practical effect to the scheme, bearing in mind that it has to be operated against a constantly changing commercial background.

It is important to avoid unduly fettering the power to amend the provisions of the scheme, thereby preventing the parties from making those changes which may be required by the exigencies of commercial life.[2]

In some cases, the trustee may need to seek advice from the court regarding the interpretation of the amending power. In all Australian State and Territory jurisdictions, there is either a statutory right or right under civil procedure rules to seek directions in relation to the interpretation of trust instruments.[3] Additionally, advice can be sought under the court’s inherent jurisdiction.

The substratum rule

Even if a trustee has an express broad power to make amendments, intrinsic implied limitations exist on a trustee’s power to amend the trust deed.

The courts have held that trustees may not use the power of amendment to alter or defeat the purpose of the trust – this is known as ‘the substratum rule'.[4] The substratum of the trust can, in essence, be described as the underlying or fundamental purpose for which the trust was formed. It is most succinctly captured by the English High Court in Duke of Somerset v Fitzgerald:

The substratum of the trust refers to its beneficial core.[5]

The substratum rule is closely linked to the ‘doctrine of fraud on a power’. It is well-known that trustees must exercise their powers only for a purpose for which the power has been conferred.[6] In the context of an amendment power, the power can only be used for the purposes of advancing the trust.  If the power of amendment is exercised for some other purpose, the amendment will be set aside as fraud on the power.

It follows that an amendment that purports to contradict or undermine the substratum of the trust is at risk of being ineffective or ultimately, resulting in or requiring a resettlement of trust in order to be effective. Notably, as stated by Megarry J in Re Ball’s Settlement Trusts:

If an arrangement changes the whole substratum of the trust, then it may well be that it cannot be regarded merely as varying that trust.[7]

In a recent decision, the Privy Council held that there is no absolute restriction on altering the purpose of the trust.[8] However, and importantly, the Privy Council held that there remains a strong presumption against using a power of amendment to alter the purpose of the trust.[9]

In our experience, most modern superannuation trust deeds contain deliberately broad amendment powers that are designed to give the trustee “maximum flexibility” and in such cases, it can be “impossible to locate any substratum at all”.[10] In these cases, the substratum principle is unlikely to operate to limit the trustee’s power of amendment. Identifying the true position on the substratum of the trust is essentially an exercise in construction and a trustee should consider its amendment power in the context of the trust deed as a whole.

In the superannuation context, it would be remiss to consider the substratum independent of the sole purpose test, which dictates a statutory purpose for the superannuation fund. While most amendment powers in superannuation trust deeds may be broad, the legislated sole purpose test will, in all cases, operate as the essential substratum of the trust for a superannuation fund. It follows that any amendment to a superannuation fund trust deed must be consistent with this sole purpose, as well as any additional substratum that can be identified on the terms of the trust (noting of course, that any additional substratum will itself need to be consistent with the sole purpose test).

If you have any questions about amending a trust deed, get in touch with one of our experts below.

[1] Kearns and Another v Hill and Others (1990) 21 NSWLR 107.

[2] Re Courage Group’s Pension Schemes 1987 1 WLR 495 at 505.

[3] See section 63 of the Trustee Act 1925 (NSW), section 63 of the Trustee Act 1925 (ACT), section 96 of the Trusts Act 1973 (Qld), section 91 of the Trustee Act 1936 (SA), section 92 of the Trustees Act 1962 (WA), rule 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic), rule 604 of the Supreme Court Rules 2000 (Tas) and rule 54.02 of the Supreme Court Rules 1987 (NT).

[4] Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65 at [68].

[5] Duke of Somerset v Fitzgerald [2019] EWHC 726 (Ch).

[6] Wong We-Young & Ors v. Grand View Private Trust Company Ltd [2022] UKPC 47 at [1].

[7] Re Ball’s Settlement Trusts [1968] 2 All ER 438 (at 442).

[8] Wong We-Young & Ors v. Grand View Private Trust Company Ltd [2022] UKPC 47 at [99].

[9] Wong We-Young & Ors v. Grand View Private Trust Company Ltd [2022] UKPC 47 at [114].

[10] Kearns and Another v Hill and Others (1990) 21 NSWLR 107.