General update
The business of being a trustee – Indemnities and losses
Freehills update
Telstra Super Pty Ltd v Finch [2009] VSCA 318 (Supreme Court of Victoria, Court of Appeal, 23 December 2009)
This case involved a total and permanent invalidity (TPI) claim which was denied by the trustee of the Telstra Superannuation Scheme (TSS). The claimant, Mr Finch, brought an action in the Supreme Court of Victoria.
Mr Finch was employed by Telstra from 1 October 1992 until 23 January 1998 and was a member of the TSS.
Mr Finch was born male but had undergone gender reassignment surgery in 1988 and commenced work for Telstra as a woman. In October 1996, Mr Finch reassumed his male personality. Mr Finch suffered from severe depression at this time and was absent from work from 30 September 1996 to 24 March 1997 when he returned to work as a male. Mr Finch undertook a rehabilitation program from February 1997 to 1 May 1997 when he was considered by his rehabilitation case manager to be capable of performing normal duties without restriction.
After returning to work, Mr Finch’s position was made redundant. He subsequently applied for and accepted another position within Telstra and was scheduled to commence work in that position in January 1998. After accepting the position, Mr Finch decided that he did not wish to undertake the new position and accepted a voluntary redundancy with effect on and from 23 January 1998. On 5 March 1998, Mr Finch commenced receiving a Commonwealth Disability Support Pension.
In February 1999, Mr Finch commenced work with Foxtel. Mr Finch resigned from Foxtel in March following a period of absence from work, citing ‘personal reasons’.
In November 1999, Mr Finch commenced work with Qantas in domestic sales working 20–24 hours a week. Mr Finch resigned in May 2000 ‘for personal health reasons’. While employed at Qantas, Mr Finch had come into contact with a male Qantas employee with whom he had previously had an ‘intimate relationship’ while living as a female and working at Telstra. This encounter had been traumatic for both individuals.
Mr Finch did not work following his departure from Qantas and soon after lodged an application for a TPI benefit from the TSS.
His application for TPI benefits was accompanied by medical evidence. However, the trustee received evidence from Telstra management expressing the view that at the time of ceasing employment with Telstra, Mr Finch was ‘fit for duty and not a TPI candidate’. On 21 March 2002, the trustee rejected Mr Finch’s TPI claim.
Subsequently, solicitors acting for Mr Finch requested that the trustee review its first determination and provided further medical reports which characterised Mr Finch’s jobs with Foxtel and Qantas after leaving Telstra as failed attempts at rehabilitation and referred to the trauma which Mr Finch had experienced in the workplace in relation to whether or not he had been recognised by his colleagues. However, during a 27 February 2003 telephone conversation with the chief executive officer of the trustee, Mr Finch volunteered that his employment with Qantas had been a ‘real job’. The trustee considered the new evidence and rejected Mr Finch’s claim for the second time on 20 March 2003.
Decision at first instance
Mr Finch brought an action in the Supreme Court of Victoria claiming that both of the trustee’s determinations were void and that he was entitled to a TPI benefit.
On 13 November 2003, Justice Byrne held in favour of Mr Finch in concluding that the trustee’s determinations should be set aside. Mr Finch had made the following three main contentions:
- The determinations made by the trustee were not open to a trustee who was acting reasonably. Justice Byrne did not agree and found that the rejection of the TPI benefit was open to the trustee on the facts.
- The trustee’s reasons were unsound. Justice Byrne confirmed that it is not the role of the court to conduct a general review of the decision-making process but simply to determine whether the reasons given were unsound. Justice Byrne found that the conclusions of the trustee ‘are all conclusions of fact which, if accepted, support the determination’.
- There was a breach of process in relying upon information to which Mr Finch did not have an opportunity to respond. It was on this basis that Mr Finch was successful in the first instance. Justice Byrne criticised the perceived weight placed by the trustee on the statement made by Mr Finch to the chief executive officer of the trustee that his employment at Qantas had been a ‘real job’ and the perceived failure to investigate the context or interpretation of this statement.
Justice Byrne stated:
It is apparent from the judgments in the [Telstra Super v Flegeltaub (2000) 2 VR 276] case that this attack upon the determination should best be seen as an allegation that the trustee failed to decide the question in good faith and to give genuine consideration to it.
Justice Byrne found the second determination of the trustee ‘void for want of compliance by the trustee with its obligations of good faith and genuine consideration’.
The definition of TPI in the TSS trust deed required, among other things, that for a member of the TSS to be TPI, the member:
- had to have been ‘continuously absent from all active Work for a period of at least six months’, and
- must also have ‘ceased to be an Employee and [be] unlikely ever to engage in any gainful Work for which the Member is for the time being reasonably qualified by education, training or experience’.
Mr Finch had pleaded that he satisfied the first requirement under this definition. Justice Byrne found that he did satisfy the six-month requirement on the basis that the expression ‘all active Work’ should be read to mean all work, not just work at Telstra and he had been absent from all work for more than six months since leaving work with Telstra. The trustee of the TSS contended that the term meant work at Telstra such that the absence had to precede termination of work at Telstra in order for the requirement to be satisfied.
Orders were made that Mr Finch’s claim for the TPI benefit be remitted back to the trustee for further consideration on the basis there was no bad faith on the part of the trustee.
Decision on appeal
The trustee of the TSS appealed this decision to the Court of Appeal, with the following three main arguments:
- Mr Finch did not qualify under the definition of TPI as he did not meet the requirements of the TPI definition under the TSS trust deed on the date of ceasing employment with Telstra as Mr Finch had not satisfied the six month absence requirement at that time.
The Court of Appeal held that the proper construction of the first part of the clause was that ‘active Work’ should be read as work at Telstra, rather than work in any job. This differed from the approach taken by Justice Byrne at first instance. It followed that Mr Finch did not satisfy the relevant definition of TPI.
This finding meant that the appeal by the trustee of the TSS must succeed.
- The trustee argued that the finding by Justice Byrne that there had been a lack of good faith and real and genuine consideration in reaching the second determination by not investigating the context or meaning of Mr Finch’s ‘real job’ statement was erroneous. The trustee argued that the failure did not, without more, mean that the trustee had not acted in ‘good faith and upon real and genuine consideration’. The trustee noted, in this regard, that Justice Byrne had expressly found that the trustee had not acted in bad faith.
The Court of Appeal held:
[T]he mere fact that a trustee makes an error as to a fact or some other matter or does not make all inquiries that may have been open to be made is not sufficient reason for the Court to set aside a determination that was made in good faith, upon real and genuine consideration, and for a proper purpose.
Further, the court held that Justice Byrne had been erroneous in placing such significance upon the ‘real job’ comment in assessing the trustee’s decision:
In my view, having regard to all the circumstances of the case, there was nothing that required the trustee to make the further investigations which the learned judge considered to be necessary. And it is not demonstrated that any gaps or errors in the trustee’s information and belief, upon matters relevant to the exercise of the discretion, were sufficiently extensive such as could found an inference that the trustee did not give real and genuine consideration to the exercise of the discretion.
- The trustee asserted that it had been denied the opportunity to be heard on the issues underlying the ‘breach of process’ findings. On appeal, the court did not agree with this contention.
Mr Finch had cross-appealed Justice Byrne’s decision to remit the TPI claim to the trustee of the TSS. The Court of Appeal found it unnecessary to consider this cross-appeal given the finding that the claim for the TPI benefit failed.
The Court of Appeal found in favour of the trustee of the TSS and held that Mr Finch’s claim for a TPI benefit must fail.
Mr Finch is seeking special leave to appeal this decision to the High Court. Freehills acts for the trustee of the TSS. We will let you know of any further developments.
Host-Plus (Qld) Pty Limited v Kelley [2009] FCA 1504 (15 December 2009)
This Federal Court of Australia decision results from an appeal from a determination of the Superannuation Complaints Tribunal (SCT).
Mr Kelley worked as a chef. He became a member of the Intrust Super Fund on 17 January 2001. The trustee of the Intrust Super Fund was Host-Plus (Qld) Pty Limited. The trust deed allowed for payment of temporary total disablement (TTD) benefits to insured members provided that the insurer, Australian Income Protection Pty Limited, accepted the claim.
Mr Kelley’s health problems related to back and hip conditions dating back to 1996. Mr Kelley had a total hip replacement in 2000 and his pain resolved until 2003 when he again started to experience some pain in his lower back and leg. In June 2004, Mr Kelley had an incident at work which caused him increased back pain. At the time of the incident he was only working two or three days per week as a result of ongoing pain. An orthopaedic specialist certified him unfit for work from March 2005. On 29 August 2005, Mr Kelley was diagnosed with a soft tissue exacerbation and an ongoing problem with his right hip, which would probably require further surgery. Mr Kelley had further surgery to his hip in November 2005.
Mr Kelley’s claim for a TTD benefit was made on 1 April 2005, citing back pain and pain in his right hip as the bases for the claim. The claim first was rejected by the insurer in August 2005, on the basis that there was no clear diagnosis, and again in November 2005, on the basis that his back and leg pain was a pre-existing condition dating from May 1996. The decision of the insurer was adopted by the trustee.
On 16 February 2007 the SCT overturned the trustee and the insurer’s decision not to pay Mr Kelley a weekly benefit under the policy, commencing for an unspecified period from 21 April 2005, on the basis that the original decision was ‘unfair or unreasonable’ under section 14(2) of the Superannuation (Resolution of Complaints) Act 1993 (Cth). The maximum payment would amount to about $88,000.
The trustee and the insurer appealed to the Federal Court.
Justice Buchanan overturned the decision of the SCT saying the following:
- There had been some confusion as to whether Mr Kelley’s complaint related to his hip or his back. The SCT held that Mr Kelley had a sickness, ‘namely osteoarthritis of the hip and structural changes in the lumbar spine’. The SCT held that there was ‘clear radiological evidence … that both the osteoarthritis of hip and the lumbar spine conditions were identified in 1996’ and that his hip operation in November 2000 addressed both his hip and back pain.
- The award of benefits was contrary to the terms of the policy.
The multiple instances of surgery on Mr Kelley’s hip were related to an underlying sickness which constituted a pre-existing sickness under the policy and excluded Mr Kelley from receiving a benefit. Mr Kelley had had treatment for this sickness in the six months before his insurance cover commenced when he had his hip replacement. The SCT had erroneously referred to a seven month period between 2002–03 where it was argued Mr Kelley did not receive medical attention.
According to the policy, pre-existing medical conditions were covered ‘provided an Insured Person [had], with the agreement of a legally qualified medical practitioner, ceased all treatment or advice for at least six (6) months during the insured Policy Period’.
- The SCT was therefore found to have made errors of law first by reaching ‘a conclusion which was contrary to the terms of the policy and involved a misapplication of it.’ Secondly, the SCT was required by law to affirm the decision of the insurer and trustee where satisfied it was fair and reasonable. Since, on a proper reading of the policy, Mr Kelley was expressly excluded from claiming the benefit as the original decision was fair and reasonable (following Retail Employees Superannuation Pty Ltd v Crocker 2001 FCA 1330).
- Finally, Justice Buchanan said in obiter that had the above reasons not been sufficient reason to set aside the SCT decision, the fact that the SCT did not specify the period for payment of the benefit would have, in itself, been enough to remit the matter back to the SCT.
Henry Review
There has been growing pressure on the Federal Government to release to the public the final report of Australia's Future Tax System Review (Henry Review). On Wednesday 3 February 2010, the Senate agreed to a motion1 for the final report to be tabled by 9.30am on Thursday 4 February 2010.
The government has not released the report at this stage.
Superannuation clearing house service
The Tax Laws Amendment (2010 Measures No 1) Bill 20102 was introduced into the House of Representatives on 10 February 2010. The Explanatory Memorandum3 explains that Schedule 1 of the Bill includes various amendments intended to support the establishment of the government’s proposed superannuation clearing house including changes allowing ‘employers to meet their obligations to make compulsory superannuation contributions for the benefit of their employees, and to promptly remit superannuation amounts deducted from an employee’s salary or wages, by paying to an approved clearing house’.
The key amendments proposed are:
- An employer will be able to reduce its superannuation guarantee liability by making payments to an approved clearing house. The current law does not reduce the employer’s liability until payment is made to a complying superannuation fund even if the payment is made through a clearing house.
It is also proposed that an employer could discharge its obligation to promptly remit superannuation amounts deducted from an employee’s salary or wages by paying them to an approved clearing house within 28 days of the end of the month in which the deduction is made.
- A contribution to a fund by an employer is made in compliance with choice of fund requirements if:
- the contribution is made through an approved clearing house
- the employee has given the employer written notice choosing a fund, and
- the employer passed the required information to the approved clearing house within 21 days of receiving it from the employee.
APRA Prudential Practice Guide PPG 234 – Management of security risk in information and information technology
On 1 February 2010 APRA published Prudential Practice Guide PPG 234 – Management of security risk in information and information technology.4
According to APRA’s media release,5 PPG 234 ‘aims to target areas where APRA’s ongoing supervisory activities continue to identify weaknesses. Topics addressed include the importance of an overarching framework, systematic IT asset life-cycle management, effective monitoring processes and robust IT security reporting and assurance mechanisms’.
An APRA-regulated entity has the flexibility to manage IT security risks as it sees fit, subject to any specific prudential requirements.
APRA makes the following key points in the PPG:
- IT security risk is ‘the intersection of IT risk and security risk which, in turn, are subsets of operational risk’ and ‘can be described as the risk of loss due to inadequate or failed internal processes, people and systems or from external events, resulting in a compromise of an IT asset’s confidentiality, integrity or availability’.
- Security risk is the potential compromise of an asset’s confidentiality, integrity or availability which ultimately can create a business risk exposure.
- IT risk ‘encompasses the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events impacting on IT assets’.
- APRA regulated institutions should identify and define IT risk and IT security risk and develop distinct practices to manage these risks.
- Management of IT risks and IT security risks must ensure that business objectives of the institution continue to be met and must be a ‘continuous and dynamic process’.
- An institution’s IT security risk management framework would generally include ‘a hierarchy of policies, standards, guidelines and procedures’ and be aligned with other risk management such as management of outsourcing. Matters which are normally taken into consideration in the development of a policy framework are identified on page 10 of the PPG.
- APRA envisages that institutions will ‘adopt a set of high-level IT security principles’ which will provide the foundation for the institution’s IT security risk management framework. Common IT security principles are outlined on page 9 of the PPG.
- APRA also anticipates each institution will manage ongoing compliance checks and programs as well as an ongoing assessment of the effectiveness of the IT security risk management framework.
- APRA states that appropriate training and awareness programs should be run by each institution regarding IT security risks and the risk management framework.
- Access control to IT assets and management of the life cycle of IT assets should be incorporated into the IT security risk management framework.
- APRA also envisages that there will be a monitoring and incident management system put in place in each institution to identify issues which may impact upon the security of IT assets and that a reporting system of breaches and incidents will be established.
- Finally, each institution should obtain regular assurance that its IT security risk management framework is effective. This may involve independent experts.