Australia: The incapacity conundrum and SMSFs – planning for the (mostly) inevitable

Last Updated: 17 November 2018
Article by Rebecca Van Langenberg

It's important that advisers raise the possibility of incapacity at the earliest opportunity.

Advisers play a key role in advising trustees and members on the initial structure of a fund, as well as the ongoing operation, management and compliance of the fund generally. For this reason, it's important that advisers raise the possibility of incapacity at the earliest opportunity and assist members in implementing strategies to address what will happen on the incapacity of each member.

What you need to know

The likely outcome on the incapacity of each member should be raised pre-emptively, and the associated risks understood and addressed in a way that takes into account each member's circumstances and succession planning requirements. In particular, it is important to consider:

  • the trustee, member and shareholder structure of the fund and the corporate trustee, including who will effectively control the fund on the incapacity of each member;
  • the appointment of an attorney pursuant to an enduring power of attorney for each member that allows the nominated attorney to step into the member's role on incapacity, and how this will occur in practice in light of the fund deed and the constitution of the corporate trustee; and
  • how the voting rights attaching to the shares in the corporate trustee will be exercised following the incapacity of one or more members.

Below we consider some of the key issues that are often overlooked in planning for incapacity in a self-managed superannuation fund context.

Voting mechanisms

It's important to consider the fund's structure and model various control scenarios before each member loses capacity, including who will exercise the rights attaching to any shares in the corporate trustee (if relevant).

While subject to the terms of the particular trust deed, it's common for fund members to have power to appoint and remove the fund trustee. This means that the members effectively have power to control the fund via the appointment or removal of the fund trustee.

It's also common for the fund deed to provide that if the members do not agree unanimously, or to overcome a 'deadlock' voting situation, the constitution and fund's trust deed may provide that the relevant voting power is weighted according to each respective member's balance in the fund.

This is problematic given that trustees are required to act together in exercising their decision making power and it could further entrench the idea of the 'controlling trustee', whereby a trustee exercises the high level and strategic decision making powers in respect of the fund, while the remaining director is essentially passive and notionally involved in the control and management of the fund.

This concept is further exacerbated by the fact that each trustee could be penalised for a contravention of superannuation law.

It is also questionable whether this arrangement is consistent with superannuation law, as the member with the lower balance will automatically be overruled on each point where a deadlock arises. This effectively defeats the purpose of having each member appointed as a trustee. This issue could give rise to future litigation if the current laws that operate in relation to minority shareholder oppression are extended to apply in this situation.

For these reasons, fund deeds providing for alternative dispute resolution strategies may provide a more reasonable, balanced and appropriate outcome generally, but especially where a fund member has lost capacity.

Succession strategies

Typically under a company constitution, a director automatically loses their office as a director when they lose mental capacity.

Importantly, on loss of mental capacity, a director's attorney appointed under an enduring power of attorney does not automatically become a director. This means that the attorney cannot act in place of the director, or exercise the voting rights of the director.

An option, however, is to tailor the fund deed and the constitution of the corporate trustee to require the attorney (subject to their consent) to be appointed as a director of the corporate trustee, generally without the consent of the remaining trustees and members. This ensures that the intended party effectively exercises the control of the incapacitated director.

A key issue is ensuring that the ability to amend, vary or modify the provisions in the fund deed and the constitution that give rise to the succession powers is restricted once a member has lost capacity. The downside to this approach, however, is the limited flexibility to adapt to changing circumstances in the future, including legislative change.

In addition to complying with superannuation law, the parties must also ensure the succession to the director role complies with the Corporations Act 2001 (Cth).

Corporate trustee structure

The shareholding of the corporate trustee of a fund is fundamental to assessing the current and future control of the fund. The exercise of each member's voting rights and what will happen on the incapacity of one or more members should be considered and discussed at the outset and a plan put in place to ensure each member's interests are sufficiently protected as part of each member's general succession and estate planning strategy.

It is important to consider who will exercise the voting rights attached to the shares held by the incapacitated member in the corporate trustee, as the shareholders ordinarily have power to appoint and remove the directors of the corporate trustee.

In particular, the constitution of the corporate trustee should provide that an attorney appointed under an ensuring power of attorney has the right to exercise the voting power of the respective shareholder. As an attorney does not have the right to exercise the shareholder rights of the relevant member as a matter of general law, if the constitution is silent on this point, the voting rights of the shareholder will effectively be forfeited.

Fiduciary obligations of attorneys

We are often asked whether an attorney can withdraw the superannuation benefits of a member before death where the death benefit is payable to adult children.

Generally, the purpose of the withdrawal of the superannuation benefits is not to benefit the incapacitated member, but to minimise any tax payable on the incapacitated member's death. This is likely to be the case where the superannuation payment is made shortly before the member dies and this was reasonably foreseeable by the attorney, or the amount withdrawn is superfluous to the member's financial requirements.

As a fiduciary relationship exists between the attorney and the member, the attorney is held to a higher standard of conduct than would otherwise be the case. The attorney has fiduciary duties that broadly involve ensuring that:

  • their personal interests and the fiduciary duty owed to the member do not conflict;
  • the fiduciary duty owed to the member does not conflict with another fiduciary duty; and
  • they do not profit from acting as attorney for the member without the member's knowledge and express and informed consent.

For these reasons, utilising an enduring power of attorney to withdraw member benefits before death should be approached with caution.

Conclusion

The importance of planning for each member's incapacity cannot be overstated and ideally, should be addressed at the outset when setting up the fund. The structure of the fund and the provisions of the fund deed and the constitution play a key role in determining the ultimate control of the fund, and the effective decision-maker.

Planning for incapacity goes beyond appointing an attorney under an enduring power of attorney, and may require tailored documents and a considered approach to ensure the strategies are consistent with each member's broader estate planning and succession requirements.

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. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions