Australia: Business Succession Factsheet: Why you need to have an enduring power of attorney for your SMSF

All members of a self managed superannuation fund (SMSF) are required to be trustees of the fund, or directors of the trustee (if the trustee is a 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 and solicitor Hannah Byrne explain 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 (if the trustee is a 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 says that if the legal personal representative (LPR) of the member is appointed within six months of the date the member stopped being a trustee or director of a trustee company, then the SMSF will continue to be a complying SMSF.

A member’s LPR is either an attorney appointed by the member under an enduring power of attorney (EPOA), or an administrator appointed for financial matters.

If a member does not have an EPOA and loses capacity, then an application must be made to the Queensland Civil and Administrative Tribunal (if the member resides in Queensland) or State Administrative Tribunal (if the member resides in WA) to appoint an administrator for financial matters. This process can be time consuming and costly, and most alarmingly, it is at the discretion of the tribunal member as to who is appointed as the administrator.

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 principal’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 principal’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 donor member can cease to be a trustee, or director of a corporate trustee, and the LPR will be considered to be appointed in their place.
• 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 enters into 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 unless Vanessa is appointed Daniel’s administrator for financial matters, she will not be his LPR and the fund will cease to be a complying SMSF.

In order to be appointed as Daniel’s administrator, Vanessa must apply to a tribunal of competent jurisdiction (for example, the Queensland Civil and Administrative Tribunal in Queensland, and the State Administrative Tribunal in Western Australia) to be appointed as Daniel’s administrator for financial matters. However, given that her husband has recently been in a serious accident and is still in a coma, applying to a tribunal is probably the last thing that Vanessa wants to do. In addition, deciding who to appoint as an administrator is at the discretion of the tribunal, and it is not necessarily the case that the spouse of the incapable adult is automatically entitled to be appointed as the administrator.

Our recommendation

While the decision to grant an EPOA should not be taken lightly, it is vital that everyone 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 help ensure that upon the loss of capacity of a member, the fund continues to be a complying SMSF.

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