The use of a self-managed superannuation fund (SMSF) as a wealth retention and investment vehicle in Australia continues to grow. This is despite the increased complexity of the rules and legislation governing SMSFs.
The ageing of SMSF members (and thus trustees/directors of corporate trustees) gives rise to the need for consideration of the continuity of appropriate management of those SMSFs in the near future. This is particularly the case in the event that SMSF members suffer from legal incapacity.
At the 2018 Super Day in Adelaide, Nicole Santinon (Statewide Super), co-author of The Tax Institute’s SMSF Income Stream Guide, presented the session ‘Powers of attorney and SMSFs’.
Nicole’s session considered the use of Powers of Attorney (POA) in the context of the management of SMSFs, and covered issues including:
- The ability for a member to grant a Power of Attorney and the role of an attorney as an SMSF trustee/director of SMSF trustee
- The ability of an attorney to deal with member/trustee/director decisions/powers and the limitations
- Managing legal incapacity of SMSF members, and
- the effective use of a Power of Attorney in a succession planning context.
Nicole’s paper is excerpted in this post.
According to Australian Taxation Office (ATO) estimates, there are approximately 596,000 SMSFs in Australia with average assets of $1.13 million per fund and some 1.1 million total members.
Around 70% of SMSFs have two members and the most common structure is a superannuation fund established by a couple. With the growing importance of superannuation and self-funded retirement, the median age of SMSF members at 59 years, and the Australian population continuing to age, it is clear that appropriate planning for the control and succession of fund assets is of increasing importance.
Just as it is important to have an estate plan which encompasses not only what happens upon death, but also incapacity, it is important that such events are considered with respect to SMSFs. Managing the potential incapacity of members (and hence the incapacity of the trustees or the directors of corporate trustees for funds) is critical.
People often assume that their spouse will be able to manage their affairs if they are incapable of doing so themselves. Unless the assets are jointly owned by spouses, this will not be possible. This is also the case in the context of a member’s involvement in their SMSF as a member and trustee/director. It is not the case that a spouse can just step in and manage an SMSF without some appropriate planning and documentation in place.
Nicole’s paper seeks to demonstrate that a power of attorney (POA) may prove a useful tool for advisors in maximising outcomes for clients and managing the risk of member incapacity in the SMSF context.
The paper provides an overview of the basis for SMSF members granting POAs, the scope and limitations of POAs and some planning strategies and opportunities involving POAs in succession
planning for SMSFs.
Before discussing some specific strategies and planning opportunities for using POAs in the context of SMSFs, it is worth briefly setting out some background in relation to the nature of a SMSF and the general operation of POAs.
Nature of SMSFs
It is the case that the very nature of the bulk of superannuation entities is that of a trust. A trust as a legal form of relationship offers the beneficiaries (or members) protection from risk, including from insolvency and incapacity of the trustee. The law is protective of the beneficial interest of the beneficiaries in the trust assets.
Sir Robert Megarry comments in Cowan v Scargill:
“I can see no reason for holding that different principles apply to pension fund trusts from those which apply to other trusts. Of course, there are many provisions in pension schemes which are not to be found in private trusts, and to these the general law of trusts will be subordinated. But subject to that, I think the trusts of pension funds are subject to the same rules as other trusts.”
This understanding is enshrined in the Superannuation Industry (Supervision) Act 1993 (“SIS Act”).
The SIS Act regulates “superannuation entities”, including “regulated superannuation funds”, as well as approved deposit funds and pooled superannuation trusts. For present purposes, this paper addresses only the structure required under the SIS Act for a “regulated superannuation fund”.
- first, the fund must have a trustee;
- second, the fund must have a trustee being either a trading or financial corporation under section 51(xx) of the constitution pursuant to a requirement in the governing rules, or the governing rules of the fund must provide that the sole or primary purpose of the fund is the provision of old-age pensions;
- third, the trustee must have provided notice to the Regulator that the SIS Act is to apply to the fund.
A regulated superannuation fund therefore must have a trustee. The remaining elements of a trust structure for general law purposes are also present in a regulated SMSF – the trust property, the trust beneficiaries, and the need for the trustee to have a personal obligation regarding the trust property with respect to the beneficiaries.
The general law as it applies to trusts therefore applies to SMSFs, unless excluded by the provisions of the SMSF governing deed or applicable legislation. Further, there are statutory covenants which apply to the trustees of an SMSF set out in section 52B of the SIS Act which, if not included in the governing rules of the SMSF, are taken to be so included.
The structure of a superannuation fund as a trust, in the context of an SMSF, has particular significance. This is because for a fund to be an SMSF, section 17A of the SIS Act requires that the very beneficiaries (members) for whom the fund is established and operated, also act as the trustees (or directors of a corporate trustee), a role pregnant with statutory obligations and duties.
The duality of roles means that the members of an SMSF have full responsibility for the management, administration and investment of the fund, which also means that the members have greater control, flexibility and choice regarding the operation of the fund. However, in the author’s opinion, it is this very level of control and autonomy which requires a greater level of planning with regard to events affecting the control of the SMSF including incapacity of a member (and therefore, trustee/director of a corporate trustee). It is in this situation that the provisions of section 17A of the SIS Act and the ability of a properly appointed representative for the member, to act in place of the member, are of importance.
Powers of Attorney and SMSFs
As noted above, section 17A of the SIS Act requires that each member of an SMSF is a trustee of the SMSF or, in the case of a corporate trustee, a director of the trustee. Importantly, the contravention of this rule may cause a fund to cease being an SMSF and, in turn, lead to serious taxation consequences.
This is subject to the proviso that if a member is a “disqualified person”, a person in the capacity of a legal personal representative of the member is not permitted to be a trustee or a director of a corporate trustee of an SMSF.
In the context of SMSFs, the flexibility provided by section 17A effectively means that for whatever reason that a member no longer wishes, or cannot continue to act in a decision-making capacity with, regard to the SMSF, there is the ability for the member’s properly appointed attorney (under EPOA), to act in place of the member as trustee/director of a corporate trustee on an indefinite basis.
The need for a legal personal representative acting under an EPOA to replace the member as
trustee/director may arise in situations such as:
- if the member is going overseas for an indefinite amount of time;
- the member no longer wishes to exercise their individual authority;
- the member is temporarily ill and unable to exercise their individual authority; or
- the member has become incapacitated.
It is the flexibility under clause 17(3)(b) of the SIS Act which can play an important role in a member’s planning regarding their superannuation. Because of the very nature of an SMSF, the autonomy and control such structure offers to a member means that having an understanding of the mechanism by which a member is able to maintain that autonomy and control via the appointment of an attorney is also necessary.
The paper goes on to look at the nature of powers of attorney, general and enduring powers of attorney, who can grant a power of attorney, the obligations of an attorney and some jurisdictional issues.
Scope and Limitations of Powers of Attorney
A POA can be employed to assist in ensuring that control of a fund is passed to the desired person or persons where a member is no longer able to act in a position of control, such as on incapacity.
There are, however, some important legal restrictions on the scope of the permissible activities of an attorney acting under a POA. These are particularly relevant in terms of the attorney acting as a trustee of the fund (in the case of a fund with natural person trustees) or a director of a corporate trustee.
The Australian Law Reform Commission (ALRC), in its report Elder Abuse – A National Legal
Response published in June 2017 comments regarding the ability of an attorney to step in to replace a member of an SMSF pursuant to section 17(3)(b) of the SIS Act in the following terms:
Further, the ALRC confirms in the Report that the nature of the appointment of an attorney to the position of trustee or director on behalf of a member of an SMSF is not in the attorney’s capacity as attorney, but in their personal capacity:
The paper goes on to look at some of the issues in acting as Trustee, acting as Director, and acting as Member. It also covers planning in the SMSF context, covering issues including:
- Temporary Absences
- Individual trustee
- Director of corporate trustee
- Key considerations
- Scope of Authority
- Conflict of interest
- Identity of Attorneys
- Liability of Attorney
- What happens when there is no EPOA.
Nicole also looks at death benefits planning, and how a member can limit the risk of a significant tax impost arising on the payment of those benefits by considering the planning opportunities that are available.
The paper concludes that, even though POAs are commonly used and prepared as part of a client’s succession planning arrangements and they appear simple enough, they are one of the most misunderstood documents around.
Whilst they have great flexibility, the specific circumstances in which an individual requires an EPOA to be in place to allow for authority to be exercised by another should be carefully considered to ensure that the succession planning objectives of the principal are achieved.
- the particular scope of any pre-existing EPOA in place;
- the limits of any subsequent EPOA for the purposes of a properly considered benefits payment strategy; and
- the mechanism through which such strategy can effectively occur.
Nicole Santinon works for Statewide Super. Nicole values building strong, authentic relationships with clients and colleagues. She enjoys the opportunity to work with and assist clients to achieve positive outcomes.
Specialising in succession planning, self-managed superannuation, tax planning and structuring advice, Nicole also advises on commercial issues in areas including business transactions, mergers and acquisitions, business succession planning and business restructuring. She has also completed her Professional Certificate in Self Managed Superannuation Funds through the University of Adelaide and was the recipient of the SMSF Association prize for that course.