Incapacity of SMSF members - The benefits of an enduring Power of Attorney

To meet the definition of a SMSF[1], all fund members must generally be trustees of the fund (or directors of a body corporate that is trustee) and vice versa. This requirement can create difficulties when a trustee or director of a corporate trustee of the fund is unable to continue to act due to incapacity.

Helpfully, an exception under s 17A(3)(b) of the SISA sets out that funds can continue to meet the definition of an SMSF where a member's legal personal representative under an enduring power of attorney (EPoA) is appointed as a trustee (or director of the fund's corporate trustee) in the member's place. Accordingly, having an EPoA in place can be of vital importance in relation to maintaining a fund's complying status where a member loses legal capacity. 

This article considers the utility of an EPoA, especially for SMSF members. It examines what must be done when a trustee or director no longer has capacity to act, having regard to the SISA, the SMSF trust deed and, where applicable, the trustee's constitution. The article refers to previous rulings provided by the ATO relating to how SMSFs can navigate issues relating to when a legal personal representative who holds an EPoA is already a trustee or director of a body corporate that is trustee of the fund.

The utility of an EPoA for people with SMSFs

An EPoA is a legal document under which an individual appoints someone else (their 'attorney') to make decisions for them, even after the individual is unable to make decisions on their own; hence, its effect is 'enduring'.  

In a SMSF scenario, an EPoA's ability to 'endure' is significant; the SISA allows for an incapacitated  individual to 'step aside' as trustee (or as director of a body corporate that is trustee), have their attorney under a valid EPoA appointed, while allowing the incapacitated individual to remain as a member of the fund.

Matters to consider: what is required to be done & when?

Director of a corporate trustee

It is important to highlight that when a member of a SMSF (who is also a director of the fund's corporate trustee) loses legal capacity, their 'attorney' under an EPoA may replace them as a director of the fund's corporate trustee; That is, the individual must resign as director and their attorney must be appointed in their place (as permitted by s 17A(3)(b) of the SISA). The process for appointment of the attorney as a director does not occur automatically.  The incapacitated director still needs to be removed and their attorney officially appointed in accordance with the SISA (within 6 months from the date of the incapacity) and this must happen in accordance with the corporate trustee's constitution (if it has one) as well as the SMSF deed. Commonly this will include:

• the attorney signing a resignation by the incapacitated director, on behalf of that person; and 
• the corporate trustee's shareholders passing a resolution to appoint the attorney as a director.

When the attorney acts as director, they must act in the best interests of all members of the fund, not only in the best interests of the individual for whom they act as an attorney. The reason for the attorney's appointment as a director of the SMSF is irrelevant; the validly appointed director holds all of the responsibilities and powers of a director and is required to help the corporate trustee operate the SMSF for the benefit of all its members.

Individual trustee

Replacing an incapacitated individual trustee with their attorney is somewhat simpler. Once appointed, the attorney assumes the obligations of an SMSF trustee. Again, it is always important to refer to the terms of the SMSF deed to ensure the appointment is valid, but commonly the process will involve:

• the attorney signing a resignation by the incapacitated trustee, on behalf of that person; and 
• the continuing trustee, or the SMSFs members, appointing the attorney as replacement trustee.

The timing and responsibilities in this scenario are similar to those outlined above for a corporate trustee; the appointment (which does not occur 'automatically' when the relevant member loses capacity) must take place within 6 months from the date of the incapacity, and the newly appointed trustee is to act in the best interests of all members of the fund, not just the member for whom they hold an EPoA.

What if my nominated attorney under an EPoA is already a trustee of the SMSF (or director of the corporate trustee)?

In a situation where a married couple have a SMSF whereby they are both members of the fund and both also trustees (or directors of the corporate trustee), it is common for them to have EPoA's for each other.

In this instance, if one of the members loses capacity and their attorney steps in, the ATO has noted that this imbalance between number of trustee or directors or the corporate trustee and number of members of the SMSF will not result in a breach of the SISA. The ATO's Ruling (SMSFR 2010/2) confirms that section s 17A(3)(b)(ii) of the SISA (which allows a person who holds an EPoA in respect of a member to be trustee, or director of the corporate trustee, of a SMSF in place of the member without causing the fund to cease to be a SMSF) allows for such 'imbalance' in number to exist, despite the overall aim of s 17A to provide for equality of influence.

Where the incapacitated member has executed an EPoA in favour of multiple attorneys, one or more of those attorneys can be appointed as trustee (or director of a corporate trustee) in place of the incapacitated member.

Future planning of a SMSF is critical. It is important to not only look after the current affairs of the SMSF but also plan ahead and consider what process the fund's members wish to follow when a member loses capacity. SMSF members who execute a valid EPoA effectively mitigate issues down the track.  

More information from Maddocks

For more information on EPoAs and their applicability to SMSFs, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Wills and Estates team

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

• SMSF Trustees: Why Should I Use A Corporate Trustee?
• New Year, New ASIC: The 2024 Enforcement Priorities
• Evidencing Arm's-Length Private Lending - SMSF Defends Against ATO NALI determination

Order related document packages

• Superannuation (SMSF) Documents
• Estate Planning Documents
• Trusts Documents
   

[1] A self-managed superannuation fund under s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA)