Reversal of Land Transfer to Self-Managed Super Fund Due to Unconscionable Conduct

1. Overview

1.1. In the case of Cihan Family Trust v Cihan Family Superannuation Fund [2023] NSWSC 1289, the NSW Supreme Court ruled that a transfer of land from a family trust to a Self-Managed Superannuation Fund (SMSF) should be reversed due to the unconscionable conduct of a son against his father.

2. Background

2.1. The father had established the family trust with assistance from his eldest son, who aided him in navigating legal documents as the father did not comprehend English.

2.2. A disagreement arose between the eldest son and the father, leading to a falling out.

2.3. The younger brother stepped in to assist the father in establishing an SMSF, with himself, his wife, and daughter as members, leaving out the mother. This was significant as it resulted in the father being outnumbered 3 to 1 among SMSF members.

2.4. The younger brother, without the father's proper understanding, had the father sign transfers of land to move property from the father's family trust to the SMSF.

2.5. Moreover, the transferred property was added to the SMSF benefits accounts of the younger brother, his wife, and daughter as a contribution, without any benefit or entitlement attributed to the father's SMSF benefits account.

2.6. Upon reconciliation between the father and elder brother, the eldest brother discovered the steps taken by the younger brother, leading to legal action.

3. The Decision

3.1. The court unwound the contribution to the SMSF by reversing the transfer of land, deeming it unconscionable since the father had no comprehension of what he was signing, given his language barrier.

3.2. Under the circumstances, the court acknowledged that the father's special disability was his inability to properly understand English.

3.3. The court determined that the younger brother exploited his father by obtaining his signature on a transfer of land from the father's discretionary trust to an SMSF set up by the younger brother, where the father was one of four members and outnumbered.

3.4. The court highlighted that the transfer of land solely benefited the younger brother and his family. The father, who financed and purchased the land in his discretionary trust, received no interest in the property upon its contribution to the SMSF.

4. Key Takeaway

4.1. While the transfer of the property to the SMSF may have complied with the family trust deed, SMSF trust deed and superannuation laws, which generally do not permit the return of benefits, this case highlights the vital point that super funds, despite being subject to strict superannuation and tax laws, are fundamentally trusts subject to equitable and common law claims.

4.2. Additionally, when practitioners are dealing with ‘representatives’ of the principal client (i.e. children, nieces, nephews etc) and there is a language barrier, steps should be taken to ensure that there is a sufficient understanding from the client and if there is doubt, interpreters are widely available. 

4.3. If you require any assistance or wish to obtain further information in relation to land transfers and SMSFs, please contact:  

Alasdair Woodford
Principal Lawyer
T: 03 5225 5217| M: 0436 456 144
E: awoodford@ha.legal

Joseph Flanagan
Associate
T: 03 5226 8504
E: jflanagan@ha.legal

Ben Smith
Lawyer
T: 03 5225 5262
E: bsmith@ha.legal

Maddi Batchelor
Graduate Lawyer
T: 03 5225 5214
E: mbatchelor@ha.legal