SMSFs continue to be a popular option for those who wish to gain more control over their super. However, clients often do not consider practical issues, such as what would happen if they are unable to continue as a fund trustee.
Section 17A of the SIS Act 1993 generally requires each fund member to be either an individual trustee or a director of a corporate trustee of the SMSF, but there is an important exception.
In the situation where a member is unable or unwilling to continue as a trustee/director, another person can be appointed to the role if they are a legal personal representative (LPR) appointed by the member under an enduring power of attorney (EPOA). This allows the LPR to act as an individual trustee/director for the member.
An EPOA can be used in a range of situations to appoint an LPR to act as a trustee/director. Three common examples include:
* where the fund member loses legal capacity due to illness or accident
* to help ensure the ‘central management and control’ of the fund remains in Australia when a fund trustee/director goes overseas, and
* where a trustee retires from their role due to poor health (but short of losing capacity) and wants to appoint another person to act on their behalf.
SMSFR 2010/2 clarifies that a person holding an EPOA for a member of an SMSF qualifies as their LPR provided the:
* LPR is personally appointed as a trustee/director
* the member themselves ceases to be a trustee/director, and
* the above events are in accordance with the SMSF trust deed, the SIS Act and any other relevant legislation.
This means, for example, that the LPR must accept their appointment in writing and execute a Trustee Declaration within 21 days of their appointment*, just as any newly appointed trustee would be required to do.
In addition, the LPR must be personally eligible to be appointed as a trustee/director, for instance, they are themselves not a disqualified person.
Corporate trustee considerations
With a corporate trustee, the appointment of an LPR must be in accordance with the constitution of the corporate trustee, the SIS Act and any relevant provisions of the Corporations Act 2001.
In addition, the member who is a director of a corporate trustee may appoint the LPR as an alternate director of the corporate trustee in their place.
If this is done, the LPR will be appointed as a director in their own right, not as an agent of the member. However, the terms of the appointment must only empower the LPR to act as a director when the member is not performing those duties themselves. The member isn’t removed from the position of director in these circumstances.
Other ruling considerations
Some other considerations contained in SMSFR 2010/2 are:
* if there are State or Territory legislative restrictions against conferring trustee duties and powers**
* the EPOA must be kept current and in accordance with the relevant State or Territory legislation during the time the LPR is a trustee or director
* while the LPR is acting as a trustee, they are liable for any civil or criminal penalties that apply to trustees for breaches of the * where a person is disqualified from acting as a trustee/director (due to a conviction for dishonesty, being an insolvent under administration, or barred by the Regulator), they’re unable to appoint an LPR to act as a trustee/director on their behalf
* an EPOA can be executed in favour of an existing member of the SMSF who is already a trustee/director, where the original member will cease to be a trustee and the LPR will be appointed in their place, and
* an EPOA can be executed in favour of multiple attorneys, one or more can be appointed as a trustee/director and multiple members can execute an EPOA using the same LPR.
**The exception contained in subparagraph 17A(3)(b)(ii) cannot apply.
What happens where no EPOA?
Where no EPOA has been granted, a number of options are possible, depending on the circumstances of the member who is unable to continue as trustee.
It is important to remember that in order to continue to be treated as an SMSF for the purposes of the superannuation law, an SMSF has no longer than six months from the date of failing*** to satisfy the basic definition of an SMSF to rectify the situation.
Failure to do so will result in the fund no longer qualifying as an SMSF and potentially becoming a non-compliant superannuation fund where penalty taxes may apply.
Where the member has lost legal capacity without granting a valid EPOA, an LPR can be appointed to act as a trustee by local, state- based administrative tribunals. This is necessary as the member is no longer legally able to grant an EPOA.
Alternative options in these circumstances could include the:
* appointment of an APRA approved
* removal of the member from the fund under the rules of the fund.
Leaving Australia indefinitely
Where a majority of trustees are leaving Australia indefinitely, EPOAs must be granted and in place prior to the trustees leaving, in order to ensure that the central management and control of the SMSF remains in Australia with the LPRs appointed under the EPOAs, at all times during the year.
Where a trustee is unable to perform their trustee duties due to poor health or infirmity, but where they have not lost legal capacity, they can grant an EPOA to someone who is eligible and willing to perform those trustee functions on their behalf.
This will leave James as the sole trustee of the fund. As long as the EPOA remains valid during the period James is the only trustee, the fund will continue to meet the SMSF definition
A disqualified person is not able to grant an EPOA to someone to act as trustee in their place. On becoming aware they are a disqualified person, a trustee must resign as trustee immediately.
Failure to do so can result in prosecution and a goal term. They then have a period of six months to remove themselves as a member of the fund without causing the fund to fail the definition of an SMSF.
Can an EPOA make, amend or renew a death benefit nomination?
It appears that there is no legislative limitation on an EPOA making, amending or renewing a binding death benefit nomination or effecting a reversionary nomination.
SIS Regulation 6.17A (rules relating to binding nominations) does not apply to SMSFs, which means that the trust deed governs whether a death benefit nomination can be accepted from the EPOA. It is generally accepted that an EPOA can renew an existing lapsing binding death benefit nomination.
A recent case**** indicates that it is possible for an EPOA to undertake actions in relation to a binding death benefit nomination. However, it is not as simple as other aspects were considered. In this case, consideration needed to be given to:
* any limitations in the trust deed
* relevant POA legislation (which is state or territory based), and
* whether it was a conflicted transaction.
****Natumon Pty Ltd (2018) QSC 185
In this particular case, it was decided that the EPOA had made a valid nomination. While the case provides some direction, a donor, in giving power to an attorney, may need to consider in the drafting of the EPOA as well as the SMSF trust deed, whether they permit an EPOA to make death benefit nominations.
Any conflicts, typically where the attorney may wish to nominate themselves as a beneficiary, should be addressed in the EPOA document, as well as the SMSF trust deed. Specific legal advice should be obtained to ensure both SIS and state based legislation is taken into consideration.
The use of an EPOA allows funds to continue meeting the SMSF definition and can be used to ensure the fund continues to meet its compliance requirements. These rules are particular to SMSFs. Care should be taken to ensure the EPOA is executed in accordance with the legislation of the State or Territory in which the member is a resident and is kept valid.
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