Retirement

Appointment of individuals holding enduring powers of attorney

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

As an individual trustee or director of a corporate trustee of a self-managed super fund (SMSF) granting an enduring power of attorney (EPOA) to someone you trust may save a lot of trouble in future. If you don’t, the continued operation of your SMSF may be obstructed if you become legally incapacitated or unable to make decisions about your super.

What is an EPOA?

When you grant an enduring power of attorney for another person or persons to act as your attorney, you give them the power to make decisions for you about financial or personal/health matters. The power can include special conditions about what you would like your attorney to do or not do. An enduring power of attorney simply means the power(s) you have granted to your attorney will continue even if you lose the capacity to make decisions.

You may elect when the power is to commence which may include a date or when you lose the capacity to make decisions. If you don’t stipulate a date or situation for it to commence, as a rule it will begin immediately and continue in force until it is revoked. Legislation that governs powers of attorney is determined on a state and territory basis and it is useful to obtain advice on how it operates in your situation. Once the power commences it doesn’t stop you from making decisions yourself if you are legally capable.

For your attorney to act on your behalf as a trustee of your SMSF, he or she must be given the power to make decisions about financial matters. Under the Superannuation Industry (Supervision) Act (SIS Act), your attorney is deemed to be your legal personal representative and is eligible to be appointed as an individual trustee or director of the corporate trustee of your SMSF.

Just because a person has been granted an enduring power of attorney does not automatically appoint them as an individual trustee or director of the SMSF’s corporate trustee. Any appointment will depend on your SMSF’s trust deed and other governing rules and whether you have lost the ability to make decisions, for example. The appointment of your attorney as trustee may also depend on the approval of the remaining fund members or trustees.

Common Trust Deed Provision

An example of a common provision in the trust deed of an SMSF concerning a trustee ceasing office could be that:

‘A person ceases to hold office as an individual trustee or as a responsible officer of a corporate trustee:
(i) Upon the person suffering a legal disability subject to clause X’

Clause X provides that if a person is suffering a legal disability then their legal personal representative may be appointed as an individual trustee or a director of a corporate trustee in place of the member during the time of the person’s legal disability.

This provision in the trust deed is workable as it appoints the person’s legal personal representative which includes someone who holds an enduring power of attorney as an individual trustee or director. In contrast, some trust deeds require a resolution from members for the appointment of the legal personal representative. In single member funds this can cause difficulties as the person who has lost capacity may be the only member of the fund and incapable of making the resolution or understanding what is required.

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What happens in practice?

In practice, the process is to document the legal disability of the member and the appointment of the legal personal representative in their place as trustee or director, as appropriate. As part of the appointment, the legal personal representative must consent to be an individual trustee or director. It is also usual that a deed of appointment is executed for the attorney to become a trustee, unless they are already a trustee for the fund.

Depending on the situation various other documents may also be required, including where required those to be lodged with the ATO and ASIC. For example:

Jasmine and Arborio are members and individual trustees of the Paddy SMSF. They have granted each other enduring powers of attorney. Unfortunately, Arborio develops dementia and loses the capacity to make decisions.

In terms of the trust deed of the Paddy SMSF Arborio ceases to be a trustee when he loses capacity, which should be documented in a minute. Jasmine is already a trustee of the fund and whilst she won’t be appointed twice as the fund trustee, it should be minuted that she has been granted an enduring power of attorney for Arborio and is his legal personal representative. From the time of this being recognised, she will be trustee for all fund matters in future.

No deed is required to be executed in this circumstance, but the change of details form would need to be lodged with the ATO to advise of the change of individual trustee.

To satisfy the definition of ‘self-managed superannuation fund’ in the SIS Act the general rule is that all members are required to be trustees of the fund or directors of the corporate trustee. A trust deed with a provision like that above could result in the fund failing to meet the definition, but luckily the legislation allows a six-month period for the fund to correct the position and comply.

No Enduring Power of Attorney?

If you don’t have an EPOA and have lost the capacity to make decisions, you won’t be able to appoint a legal personal representative to act in your place as you do not have the capacity to do so.

In this situation, a family member or other concerned person may apply to the respective state guardian or their equivalent for the appointment of an administrator and guardian. This person does not hold an EPOA but is appointed as your legal personal representative, who could take your place as trustee.

This process can be costly, drawn out and probably will exceed the six-month timeframe to meet the definition of an SMSF. It is possible that the guardian who is appointed as your legal personal representative may not be the original applicant to the Tribunal. The job of the Tribunal is to appoint the most appropriate person in their view to act on your behalf.

If your SMSF has more than one trustee, for example your spouse, after you lose the ability to make decisions that person may assume your role as trustee. If this results in your benefit being rolled out of the fund, the fund may then meet the definition of an SMSF. If the remaining trustee is the sole member of the fund it may require a restructuring of the trustee to appoint a sole director company or another individual trustee which will allow the fund to meet the SMSF definition and remains complying before the expiration of the six-month period.

Failure to remain complying puts the fund at risk of becoming a non-complying fund and having assets and income taxed at a penalty rate.

Other Uses of an EPOA

An EPOA is useful if you lose your decision-making capacity but it may also have a role if you decide someone else can be trustee and look after the running of the fund for you. This could occur if you or your partner are ill for a period, travel overseas or other activities take priority. In these situations, your legal personal representative can take your place as trustee.

It’s important to know that if you cease to be a resident of Australia, your fund may face residency issues that may have the fund taxed at penalty rates as a non-complying fund. In this situation your legal personal representative may be trustee in your place. This is a complex area and can catch trustees out with costly consequences as the ATO doesn’t have discretion with regard to taxing the fund as non-complying. Make sure you seek advice about the treatment of your SMSF if you are leaving the country for more than a normal overseas holiday.

One situation where your legal personal representative is unable to be trustee in your place is if you’re declared insolvent (bankrupt). If you’re declared insolvent your benefit in your SMSF is required to be transferred to a public fund as you and your legal personal representative acting in your place are not able to be a trustee or director of a corporate trustee while you are insolvent.

The sensible rule, as always, is to seek professional advice in drafting an EPOA to ensure it is in accordance with your needs, the superannuation law and any other estate planning you have in mind.

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Graeme Colley, Executive Manager, SMSF Technical and Private Wealth, SuperConcepts
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While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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