Part 1 of this post explained the importance of an enduring power of attorney (‘EPA’) in ensuring that a self-managed superannuation fund (‘SMSF’) retains its status as such under section 17A of the Superannuation Industry (Supervision) Act 1993 (Cth.) (‘SIS Act’).

Section 17A also requires that the legal personal representative (‘LPR’) is also a trustee of the fund or a director of the corporate trustee of the fund. In most cases, the existing incapacitated member must also be removed as a trustee or director. This is specifically noted by the Australian Tax Office in its Self Managed Superannuation Fund Ruling 2010/2 (‘SMSFR 2010/2’):

In order to comply with subparagraph 17A(3)(b)(ii), the legal personal representative must be appointed as a trustee of the SMSF, or a director of the corporate trustee of the SMSF. The member must cease to be a trustee of the SMSF or a director of the corporate trustee except where the legal personal representative is appointed as an alternate director.

Example 1

Let's look at an example of this: Richard and Regina are the sole members of a SMSF. They are also the only directors of the fund’s corporate trustee. Regina executes an ensuring Power of Attorney (EPA) in favour of Michael.

This is insufficient for Michael to become a director of the trustee company. Effectively, the removal and appointment of trustees/directors is a separate, discrete issue to each member completing an EPA.

The Second Step & Importance Of Trust Deed & Company Constitution

Attention therefore turns to the trust deed of the SMSF. Where the incapacitated member is the director of a corporate trustee the company constitution will be important. Other legislation may also apply. The ATO makes this point very clearly in paragraph 9 of SMSFR 2010/2:

The appointment of the legal personal representative as a trustee and the removal of the member must be in accordance with the trust deed, the [SIS Act] and any other relevant legislation….[and] …The appointment of the legal personal representative as a director of the corporate trustee and removal of the member from this position, must be in accordance with the constitution (if any) of the corporate trustee, the [SIS Act] and the relevant provisions of the Corporations Act’

The ‘removal and appointment’ stage of the matter therefore involves close consideration of the trust deed and/or the company constitution.

Appointing Successor Trustees Or Directors

A potential solution to the problems arising on the incapacity of an SMSF member is for an individual trustee or a director to nominate a successor. For the sake of completeness and greater certainty, the nominated successor should also be the donee of the nominating member’s EPA. If this alternative is pursued, section 118 of the SIS Act must be considered:

A person is not eligible for appointment as a trustee of a superannuation entity, or as a director of a corporate trustee of a superannuation entity, unless the person has consented in writing to the appointment.

Unless this consent in writing is obtained (preferably before the nominating member’s incapacity) the appointment will be invalid.

Example 2

Patricia and George are both members of an SMSF. They are married. They are also individual trustees of the fund. Patricia has two children from a previous marriage. She wants her children to be involved in the SMSF if she loses capacity and executes an EPA in their favour. The SMSF trust deed has suitable provisions to allow members to nominate successor trustees.

Patricia nominates her children as successor trustees pursuant to these provisions. Her children provide the necessary consents under section 118 of the SIS Act.

Patricia loses capacity. Patricia’s children will succeed her as trustees of the fund.

As can be seen, this strategy is heavily dependent upon the governing rules of the SMSF (or the company constitution for corporate trustees) having suitable provisions in place to permit it. Again, the issue of trust deeds and company constitutions is crucial. If used, these successor provisions may also assist in effective transfer of control of an SMSF upon death of a member – not only disability.