Most people will suffer a loss of mental capacity before they die. The only real question is when it will commence and the length of time it will persist. This raises particular problems for those people who operate a self-managed superannuation fund (“SMSF”).

The law on mental incapacity and self managed superannuation funds

Section 17A of the Superannuation Industry (Supervision) Act 1993 (Cth.) (‘SIS Act’) sets out the requirements for a superannuation fund being a “self-managed superannuation fund”. If an SMSF  has a member who lacks mental capacity, then the fund in question may no longer meet the definition of a self-managed superannuation fund under section 17 A. However, the section also provides a “second chance” to funds which fail the test.

Section 10 of the SIS Act includes in its definition of ‘legal personal representative’ (‘LPR’) a person who holds an enduring Power of Attorney (‘EPA’) granted by a person.

Subsection (3)(b) of section 17 A provides that “a superannuation fund does not fail to satisfy the conditions specified in subsection (1) or (2) by reason only that… the legal personal representative of a member of the fund is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during any period when… the member of the fund is under a legal disability… or the legal personal representative has an enduring power of attorney in respect of the member of the fund…”

Effectively, this means that where a member lacks capacity and this lack of capacity would otherwise lead to the fund ceasing to be an SMSF under the legislation, the fund will continue to be an SMSF if the member has given an EPA to another party and that other party is a trustee of the fund (if the trustees are individuals) or a director of the corporate trustee (where a company is a trustee).

All self managed super fund members must have an enduring Power of Attorney

The first important point to note here is that all SMSF members must have an EPA. The reason for this is that if the person who receives power to act under the EPA (the donee) is a trustee or a director of the trustee company instead of the donor, the SMSF will continue to qualify as an SMSF.

However, careful reading of paragraph (3)(b) of section 17A shows that the sub section has a further requirement apart from the members of the fund having EPAs: that the LPR is also a trustee of the fund or a director of the corporate trustee of the fund as the case may be. Many people assume that if a member grants an EPA the donee of that EPA automatically becomes a trustee/director simply by operation of the sub section. This is incorrect. It is a separate and distinct step which must be undertaken.

In part two of this article, we explain how donees of EPAs may be made trustees of the fund or directors of the corporate trustee and issues associated with this.