For the beneficiary of a large damages award with insufficient mental capacity to manage their own funds, the court would typically order those funds to be held by a Public Trustee or trustee company and manage those funds under a court appointed trust for the use and benefit of the plaintiff during their lifetime. But for such beneficiaries there is potentially substantial benefit to be obtained from the transfer of some of those funds into superannuation.

Trustees failing to consider the transfer of funds into superannuation for incapacitated recipients of damages awards have been found in other jurisdictions to be liable: Re CAC [2009] QGAAT 63, but in Western Australia the authority to do so has now been clarified in two recent decisions having a significant impact upon personal injury claims.

In the case of Perpetual Trustee Company Ltd v Cheyne [2011] WASC 225, a matter in which Kott Gunning was involved, Mr Cheyne sustained serious injuries in a motor vehicle accident, with damages compromised at just under $5.5million. Perpetual was appointed as trustee of those funds in the District Court and considered it prudent to invest 98% of those funds into superannuation, with projected additional benefits to the fund of $10 million during Mr Cheyne's lifetime.

Specific benefits expected were:

  • No income tax payable on the transfer provided it was made within 90 days (s292-95(1)(b) Income Tax Assessment Act ("ITAA");
  • No income tax, or substantially reduced income tax of 15% payable on income from the investment of the contribution (s280-20(3), (4); s295-10; s295-385; s295-390 ITAA);
  • No income tax payable on withdrawal of the contribution whether as a lump sum or income stream (s292-95(1); s 301-10 and 301-30 ITAA);
  • Even if point 3 was incorrect, tax free status for some or all of the after tax earnings from investment, or substantially reduced tax to a maximum of 20% due to offset benefits on withdrawal.

Justice Edelman was required to consider the powers of a trustee under a court ordered trust of judgment funds for the benefit of the severely injured plaintiff. He declared that the trustee had power in the circumstances to transfer trust funds to a superannuation fund to be administered for the benefit of Mr Cheyne.

In doing so he departed from a decision of Wisbey DCJ of the District Court in the case of McInnes v Insurance Commission of Western Australia [2011] WADC 17 in which a trustee's application to invest a damages award into superannuation was rejected on the basis that this would amount to a divestment of those funds by the trustee and deprive the Court of protective control, contrary to its parens patriae jurisdiction. Justice Edelman concluded that although the District Court would not have power directly to supervise those funds, the same degree of scrutiny would exist for Mr Cheyne's protection.

Since the Cheyne decision, Justice Beech of the Supreme Court has applied those principles in the matter of Re Hoang Minh Le; ex parte The Public Trustee [2012] WASC 31 in authorising the Public Trustee to invest the substantial bulk of trust funds from a personal injury settlement of over $4.7 million into superannuation. In order to avoid the need for future applications of that type, Justice Beech considered that the District Court could direct that the trustee have power to apply the income and capital of the trust fund for the maintenance, welfare, advancement or otherwise for the benefit of the person under the disability. When combined with the effect of the decision in Cheyne, this means that an order to that effect empowers the payment of some or all of the trust funds into superannuation so long as it is 'for the advancement or otherwise for the benefit of the beneficiary'.

An issue yet to be determined is the extent to which the ability to make such investments will impact upon the amount of future compromises on the assumption that such investments can now be made.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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