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Business Succession Factsheet: Why you need to have an enduring power of attorney for your self managed superannuation fund

All members of a self managed superannuation fund (SMSF) are required to be trustees of the fund, or directors of the trustee company. SMSF trustees regularly make significant decisions about their fund, but particularly as they reach the latter stages of life, their capacity to make decisions may become impaired.

In this factsheet, Associate Laura Hanrahan explains why it is essential that members of a SMSF have executed an enduring power of attorney.

SMSF members must be trustees or directors

The Superannuation Industry (Supervision) Act 1993 requires all members of a self managed superannuation fund to be either a trustee, or a director of the trustee company.

Typically, a SMSF’s trust deed will provide that a trustee stops being a trustee if they lose capacity. Constitutions of trustee companies are likely to have similar disqualifying provisions for directors.

If a member of a SMSF becomes incapacitated and therefore stops being a trustee or director of the trustee company, the SMSF is, strictly speaking, no longer a complying SMSF. There are extreme consequences (including tax consequences) which flow if a SMSF becomes non-complying. However, the Superannuation Industry (Supervision) Act allows the SMSF continued compliance provided the legal personal representative (LPR) of the member is appointed, a trustee or director, within six months of the date on which the member ceased to be a trustee or director of a trustee company.

The LPR of a member who is incapable is either the trustee of the estate of a person under a legal disability or a person who holds an enduring power of attorney (EPOA) granted by the member.

If a member does not have an EPOA and loses capacity, then unless the member regains capacity within the six month time frame, there is no way the SMSF can remain a complying SMSF.

Legal personal representatives and SMSFs

Having a validly executed EPOA not only helps ensure that the fund can continue to be a complying SMSF if a trustee loses capacity, but also allows the trustee themselves to choose the most appropriate replacement as trustee.

A valid EPOA will not automatically allow the attorney to exercise the member’s powers as a director of the trustee company. However, it will allow the attorney to exercise voting rights attached to the shares held by the member in the trustee company, which will usually enable the attorney to be appointed as a director of the trustee company. The constitution of the trustee company should be reviewed at the time of preparing the EPOA.

Similarly, a valid EPOA will not automatically allow the attorney to exercise the member’s powers as a trustee of the SMSF. However, it will allow the attorney to exercise the rights attached to membership of the SMSF, which will typically enable the attorney to be appointed as a trustee of the SMSF. The most recent trust deed of the SMSF should be reviewed at the time of preparing the EPOA.

In order to meet the requirements set out in the Superannuation Industry (Supervision) Act and the Self Managed Superannuation Funds Ruling SMSFR 2010/2, the following conditions must be satisfied:

The LPR must be appointed as a trustee of the SMSF, or as a director of the corporate trustee of the SMSF. The appointment of the LPR must be in accordance with the trust deed, the constitution of the trustee company (if any), the Superannuation Industry (Supervision) Act, and any other relevant legislation (such as the Powers of Attorney Act 1998 (Qld), the Guardianship and Administration Act 1990 (WA) and the Corporations Act 2001 (Cth)).

A member who has lost capacity must cease to be a trustee of the SMSF or a director of the corporate trustee upon the appointment of their LPR.

Where the EPOA appoints multiple attorneys, one or more of those attorneys can be appointed as trustee or as director of the corporate trustee in place of the member.

Similarly, multiple members are able to execute an EPOA for the same LPR, who can be appointed as a trustee or a director of the corporate trustee in place of each of those members.

A member is also able to execute an EPOA in favour of an existing member who is a trustee or director of the corporate trustee. In this case, the incapable member can cease to be a trustee, or director of a corporate trustee, and their LPR, already a trustee or director in their own capacity, will also be considered to be appointed in the capacity as LPR for the incapable member.

The LPR will perform their duties as a trustee of the SMSF or a director of the corporate trustee pursuant to their appointment to that position, rather than as agent for the member.

A case study: Why you need an enduring power of attorney

The importance of having a validly executed enduring power of attorney is best illustrated with an example.

Daniel and Vanessa are married and are members of a SMSF, the trustee of which is Empire Bass Pty Ltd. Daniel and Vanessa are the only directors of Empire Bass. They have recently relocated from Sydney to Brisbane, and have been busy settling into their new surroundings, so they haven’t had a chance to organise valid enduring powers of attorney.

Daniel is cycling to work one day, has a road accident and is in a coma.

Under the terms of the constitution for Empire Bass, Daniel ceases to be a director upon his loss of capacity. The SMSF trust deed provides that Daniel, upon his loss of capacity, will continue to be a member of the SMSF.

So why will this cause a problem? Remember that to be a complying SMSF under the Superannuation Industry (Supervision) Act, all members must be directors of the fund’s corporate trustee. In this case, Daniel and Vanessa are both members, but only Vanessa is a director, so the fund risks becoming a non-complying fund.

If Daniel had executed an enduring power of attorney appointing Vanessa as his attorney for financial matters, then once Daniel ceased to be a director of the corporate trustee due to his incapacity, Vanessa (as a continuing director of the trustee company) would be considered to be appointed in Daniel’s place. As a result, the SMSF would continue to be a complying SMSF.

However, Daniel and Vanessa don’t have EPOAs, so Daniel does not have an LPR and unless Daniel regains his capacity within 6 months Vanessa will have no option but to roll Daniel’s member benefits out of the SMSF.  If she does not roll out Daniel’s member benefits then the fund will cease to be an SMSF.

Our recommendation

While the decision to grant an EPOA should not be taken lightly, it is an important document which all adult Australian’s should have in place, but it is particularly vital that every adult who is a member of a SMSF execute a valid EPOA. As shown in the example above, failing to have an EPOA can result in disaster if a member loses capacity. Having an EPOA will ensure that upon the loss of capacity of a member, the fund can continue to be a complying SMSF.

For more information on setting up an enduring power of attorney, please contact HopgoodGanim Lawyers’ Estate Planning and Administration team.  

HopgoodGanim Lawyers is a legal firm of trusted experts. Founded 40 years ago, the HopgoodGanim of today remains fiercely independent and proud of our sustained growth and ongoing success. We deliver exceptional commercially-focused legal advice to clients throughout Australia and internationally and in addition to our corporate and commercial teams, we also house one of Australia’s most highly regarded family law practices.

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