Self managed superannuation funds (SMSFs) are the fastest growing sector of the superannuation industry.
One often overlooked and misunderstood aspect of SMSFs is the requirement that the members must always, either directly or indirectly, have input into the management and control of their SMSF, in order to be eligible for the generous tax concessions available to superannuation funds.
To ensure that this requirement is met, every member of a SMSF should have in place an Enduring Power of Attorney (EPOA). The issue is best illustrated by an example.
Mac and Cindy are both members of the Horse Lovers Superannuation Fund. In order to comply with the requirements of the Superannuation Industry (Supervision) Act 1993 (SIS Act), Mac and Cindy must, subject to the exceptions I will refer to below, be either the personal trustees of the fund or the only directors of the company that is trustee of the fund. Mac and Cindy are the directors and shareholders of Horse Lovers Pty Ltd, which is the trustee of their fund.
What happens if Cindy loses capacity?
Assume that following a horse riding accident, Cindy suffers serious head injuries which result in her losing her legal capacity. As Cindy has lost legal capacity she is unable to fulfil her role as a director of MAKING SURE YOUR SMSF REMAINS COMPLIANT Horse Lovers Pty Ltd and participate in the management and control of the Horse Lovers Superannuation Fund.
One often overlooked and misunderstood aspect of SMSFs is the requirement that the members must always, either directly or indirectly, have input into the management and control of their SMSF, in order to be eligible for the generous tax concessions available to superannuation funds.
The SIS Act provides that a SMSF will not be in breach of the rules and will remain compliant if Cindy’s legal personal representative takes over her role in the management of the SMSF on her behalf. In this context legal personal representative means the trustee of the estate of a member under a legal disability or a person who holds an EPOA granted by a member. If Cindy did not have an EPOA a legal personal representative would need to be appointed by an organisation such as the ACT Civil and Administrative Tribunal or the Guardianship Tribunal of NSW. As Cindy has an EPOA, appointing Mac as her attorney, Mac is spared from having to apply. However Cindy having an EPOA, is not enough in itself to deal with the problem. It is only the first step.
In order to participate in the administration of the SMSF on Cindy’s behalf, Mac must take the necessary steps, in accordance with the terms of the Deed governing the SMSF and the constitution of Horse Lovers Pty Ltd, to become a director of the trustee company on Cindy’s behalf before the administration of the fund can continue. Becoming the trustee of the SMSF is relatively straight forward in the case of SMSFs with personal trustees, however, care must be taken in relation to SMSFs with corporate trustees. The reason for this is that an EPOA is of no use if the shareholding and/ or constitution do not allow the attorneys to become directors without the consent of another party and that consent is withheld.
Accordingly, we recommend that appropriate steps are taken to ensure that the constitution of the corporate trustee allows the attorney to step in as a director of the trustee company in place of the member without requiring any other party’s consent or approval