10 September 2020

It is vital for all SMSF members to have an Enduring Power of Attorney (EPOA)



If a member loses capacity without an EPOA, it creates a time-consuming and costly challenge for the SMSF to resolve.
Australia Finance and Banking
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All Self Managed Super Fund (SMSF) members should have a valid enduring power of attorney (EPOA). Should a member lose their mental capacity without an EPOA, the position of trustee in the SMSF may become vacant and the SMSF risks becoming a non-complying fund.

Ultimately, if a SMSF becomes a non-complying SMSF it may be taxed up to 45 per cent unless it rolls over the incapacitated members benefits to public offer fund (and liquidates assets) or becomes a small APRA fund (with professional trustee).

Planning for incapacity in a SMSF

Under the Superannuation (Industry Supervision) Act 1993 (Cth) (SIS Act), all members of the SMSF are required to be trustees or directors of the corporate trustee.

If a SMSF member loses mental capacity, they are no longer considered fit and capable of acting as an individual SMSF trustee or as a director of a corporate trustee and should be immediately removed from that position.

The removal of an incapacitated trustee should occur in accordance with the SMSF trust deed (for individual trustees) or company constitution (for corporate trustees), and may occur automatically on the member's loss of mental capacity depending on the rules / constitution.

Replacing an incapacitated member

The SIS Act allows a legal personal representative (LPR) to take the place of the member as trustee or director of corporate trustee without causing the fund to cease to be a SMSF.  A LPR includes an attorney under an EPOA.

Importantly, an LPR does not automatically become the new trustee / director on the members' incapacity.  The LPR must act to resign the member and appoint themselves to replace the incapacitated member as:

  • Individual trustee: in accordance with the SMSF trust deed; or
  • Director of the corporate trustee: in accordance with the company constitution.

There is a 6 month period of grace in which the replacement as trustee or director of the incapacitated member must occur (unless the member regains capacity within this period and resumes their SMSF duties).

This clearly creates a challenge for the SMSF should a member lose capacity without an EPOA, resulting in expense and complexity to resolve.

What should be done?

An EPOA must be put in place before the member loses capacity for it to be valid.  An EPOA may be executed in favour of multiple attorneys, and one or more of those attorneys can be appointed in place of the member.

It is important that each SMSF trust deed is reviewed to ensure it provides members the ability to appoint an attorney (most modern SMSF deeds have the ability to do so).  If the trust deed does not allow the appointment of an attorney as trustee, the trust deed may need to be varied, or Court direction applied for.

Note that once appointed, the LPR is a trustee or director in their own right with legal powers and responsibilities and may incur civil and or criminal consequences for breaches of the SIS Act.  It is important that legal advice is obtained to ensure an appropriate person is appointed.

If a member loses capacity without an EPOA

Should a member lose capacity without an EPOA, an application to the Guardianship Division of NSW Civil & Administrative Tribunal is required by family members or concerned persons to be appointed to act for the member (this may take longer than the 6 month time period, and can be subject to more onerous review).

This is a time consuming, costly and burdensome process, which can be avoided if the SMSF member plans for incapacity by implementing a valid EPOA to ensure the continuation of their SMSF.

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.

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