The member-trustee requirement
Section 17A of the Superannuation Industry (Supervision) Act 1993 (SISA) outlines basic conditions that a Self Managed Super Fund (SMSF) must satisfy in order to be an SMSF, including that all members of the fund must be trustees of the SMSF or directors of the corporate trustee.
But what if a member loses capacity?
In circumstances where an SMSF member loses capacity, they can neither be a trustee nor a director and so there is the risk that the position of the trustee/director may become vacant.
This has the potential for some serious issues for an SMSF as it may risk becoming a non-compliant SMSF by the ATO unless it either arranges for a replacement APRA-approved trustee to be appointed or the incapacitated member's benefit leaves the fund (e.g., by being rolled over into a retail fund).
Rolling over a member's benefit into a retail fund may require assets held within the SMSF to be sold and converted to cash. This will often trigger significant tax consequences (e.g., stamp duty and capital gains tax).
How can an Enduring Power of Attorney assist?
The SISA allows circumstances when other persons may be trustees or directors, for example, when a member dies or becomes incapacitated.
Where a member has granted an Enduring Power of Attorney, then the SMSF can comply with the legislative requirement by the attorney becoming the trustee or director in the place of the member. Unfortunately, most people are not aware of this very important statutory exception to Section 17A of the SISA.
Are there any practical issues to bear in mind?
Yes. The ATO considers that in order to comply with the exception noted above, the attorney must actually be appointed as a trustee or director. This means that the incapacitated trustee/director must be removed from office so the appointment can take place. In other words, an attorney does not automatically become a trustee or director in place of the member. Once appointed, the attorney performs his or her duties as a trustee/director rather than as attorney for the member.
Also, the resignation of the incapacitated trustee and the appointment of the attorney as trustee must be in accordance with the SMSF's trust deed, the SISA and State or Territory Trustee legislation. Where there is a corporate trustee, the resignation and appointment must also be in accordance with the company's constitution and the Corporations Act 2001.
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.
