This article is more than 24 months old and is now archived. This article has not been updated to reflect any changes to the law.

clearlaw

What happens when a sole member of an SMSF loses capacity?

A loss of capacity of a person can occur when a person is unable to understand the nature of a document or is unable to communicate a decision. As the population ages, issues can arise which can impact a person's ability to make decisions - including a member's ability to make decisions relating to their SMSF. Trustees have only 6 months from a person's loss of capacity to take steps to ensure the fund remains compliant so it is important to have a contingency plan in place.

Alexandra Hodsman, Maddocks Lawyers

An aging population

The federal government has predicted that by 2022 there will be four million people in Australia aged between 65 and 84 years. The most recent ATO statistics show that at 30 June 2017, there were just over 1.1 million SMSF members, of whom 83% were 45 or older. The average member age was 58 years old.

In the coming years there will be a significant number of SMSF trustees entering an age where the deterioration of mental capacity is a probable risk. Planning for the eventuality of loss of capacity is just as important as estate planning.

Rules governing trustees and members of a sole-member SMSF

Section 17A(2) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) states that for a sole-member SMSF to be compliant, the member must be one of only 2 trustees. Alternatively, the member can be the sole director of the corporate trustee, or one of two directors of the corporate trustee.

However, the SIS Act also contemplates a scenario where a person who has lost capacity can remain as a member despite needing to be removed as trustee. Section 17A(3) says that a SMSF will still be valid if a member loses capacity if:

  • the legal personal representative (LPR) of a member of the fund is a trustee/director of the corporate trustee; and
  • the LPR has an enduring power of attorney in respect of the member of the fund.

Accordingly, a SMSF will still be compliant where there is one sole incapacitated member with an LPR acting as trustee/director of the corporate trustee in place of that member.

For example:

Jane is the sole member of a SMSF and is one of two trustees. The other trustee is her husband John. She has recently been diagnosed with Alzheimer's disease and has an enduring power of attorney in place appointing her daughter Emma as her LPR. In every case the deed should be reviewed relating to how trustees are removed and appointed, however the trustee with capacity should effect the replacement of Jane as trustee by appointing Emma in her place. Jane remains as a sole member and the SMSF remains valid.

Enduring power of attorney

An enduring power of attorney is a legal document by which a person appoints another person who can act - as legal personal representative - for the incapacitated member during the period of incapacity. It allows the attorney to make certain decisions on the person's behalf. These decisions can be for either financial or personal matters, or both.

There are some points to note about the power of attorney:

  • it must be in force before the member loses capacity;
  • it must be current; and
  • it must accord with relevant state or territory legislation.

What if there is more than one attorney appointed?

Where an enduring power of attorney is executed in favour of multiple attorneys, one or more of those attorneys can be appointed as trustee/corporate director in place of the member - noting that the maximum number of SMSF trustees/corporate directors contemplated by the SIS Act is 4.

It is important to note whether multiple attorneys have been appointed to act 'jointly' or 'severally' under an enduring power of attorney, as this will affect the decision-making process by which they appoint one or more attorneys to act as trustee/corporate director. If one out of four attorneys has the power to act severally, then one attorney has the power to make decisions on behalf of the incapacitated member without consulting the other attorneys - and could conceivably accept an appointment to act as the only trustee/corporate director in place of the incapacitated member. However, if each attorney is appointed 'jointly' then all decisions must be made as a group - that group would need to make a decision about who is to be appointed as trustee/corporate director.

Once appointed, either as an individual trustee or director of a corporate trustee, those persons will be bound by legal and fiduciary obligations by virtue of their new position.

Steps to effect the change

Whether or not you can remove and appoint an individual or a corporate trustee will depend on the terms of the trust deed governing the SMSF. In the case of replacing directors of a corporate trustee, the constitution of the company will set out the process for removal and appointment.

Usually a SMSF trust deed will require any appointment or removal of trustees to be in writing.

You should also check the terms of the enduring power of attorney to ensure that it is valid and contemplates an attorney making financial decisions (whether jointly or severally) on behalf of the incapacitated member.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw article on a range of topics

 

Lawyer in Profile

Leigh Baring
Leigh Baring
Partner
PH: 61 3 9258 3673

Leigh is a partner in the Maddocks Tax & Revenue team.

Leigh regularly provides advice on:

  • structuring of businesses and transactions;
  • mergers and acquisitions;
  • corporate reorganisations and distributions;
  • sale of businesses;
  • demergers;
  • capital raisings;
  • joint ventures and property developments;
  • international tax (both inbound and outbound);
  • succession planning; and
  • liquidations.

His advice covers both direct and indirect tax considerations.

Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.