Bryce Figot

It is absolutely vital that everyone who is a member of a self- managed super fund (SMSF) has executed an enduring power of attorney. This is a non-negotiable point!

If a person is not willing to have an enduring power of attorney, then they should not have an SMSF. Failure to have an enduring power of attorney will result in disaster when the member loses capacity.

Having enduring powers of attorney in place goes a long way to ensuring that upon loss of capacity the fund continues to be an SMSF (and thus continues to be a complying superannuation fund and retain its tax concessions).

Sadly, anecdotal evidence suggests that only a minority of SMSF members actually have enduring powers of attorney.

The need for powers of attorney is best illustrated with a case study. The following case study considers a corporate trustee. However, the need for enduring powers of attorney is just as real where individuals are the SMSF trustees.

Sienna and Oliver are a married couple and the members of an SMSF. They are also the only directors of a company that acts as trustee of the SMSF. Unfortunately, like many SMSF members, they do not have valid enduring powers of attorney in place.

Oliver loses capacity. There could be any number of reasons for this. For example, he might be cycling to work one morn- ing and have a road accident, causing him to enter into a coma. Alternatively, as is the case for many people, before dying he might simply lose capacity due to senility and be unable to make decisions for years in the lead-up to his death.

Under the terms of most company constitutions, Oliver ceases to be a director upon his loss of capacity. However, under most SMSF governing rules, upon his loss of capacity, he continues to be a member.

Consider whether in this case the fund is still an SMSF. Remember that to meet the definition of an SMSF all members typically must be directors. Here, both Sienna and Oliver are members but only Sienna is left as a director!

However, there is a six-month “period of grace”. Accordingly, the fund does not cease to be an SMSF until six months after the day that Oliver loses capacity and ceases to be a director (Superannuation Industry (Supervision) Act1993 (Cth) (“SISA”) s 17A(4)(b)).

A fund that ceases to meet the definition of SMSF can cease to be considered a complying superannuation fund (see,for example, Coreta Pty Ltd and Commissioner of Taxation [2009] AATA 105 [25]-[43]).

However, there is a relevant exception that can save the day.

The fund will still be an SMSF if someone who is Oliver’s “legal personal representative” is a director, even if Oliver is not a director (SISAs17A(3)(b)). Oliver’s “legal personal representative” can include a number of people, such as the trustee of Oliver’s estate – where Oliver is under a legal disability – or a person who holds an enduring power of attorney granted by Oliver (SISA s 10(1)).

Hence, if Oliver had executed an enduring power of attorney in favour of Sienna, Sienna would be his legal personal representative. Therefore, because his legal personal representative is a director, the fund would still be an SMSF and it could continue with this structure indefinitely.

Unfortunately, there is no enduring power of attorney. Accordingly, unless Sienna becomes the trustee of the estate of Oliver, she will not be his legal personal representative and thus the fund will cease to be an SMSF.

Where there is no enduring power of attorney, Sienna can apply to the appropriate tribunal or board in the relevant jurisdiction. (For example, in Victoria she would apply to the Victorian Civil and Administrative Tribunal.) However, having to make such an application is riddled with problems. One problem is that there is no guarantee as to who the tribunal will select to be Oliver’s legal personal representative. It might consider that Sienna is too closely intertwined and therefore not the best person. Accordingly, it might select someone unexpected (for example, State Trustees Ltd).

Another problem is that applying to a tribunal is a stressful process. It is typically the last thing that people want to do when a loved one has lost capacity. However, unless Oliver has appointed an enduring power of attorney, such an application will be needed in order to ensure that the fund continues to meet the definition of SMSF.

Enduring powers of attorney can also play other important roles,including ensuring that the right people have control o the fund when a member loses capacity. This can be particularly important where, for example, a member has a second spouse and children from a previous relationship.

Enduring powers of attorney can also assist where SMSF members go overseas yet members want to ensure the central management and control of the fund ordinarily stays in Australia.

Having an enduring power of attorney is vital. Without one, when an SMSF member loses capacity, loved ones may well find themselves before a tribunal or board trying to have a legal personal representative appointed just so the fund can retain its complying status.

Bryce Figot is a senior associate at SMSF law firm DBA Lawyers (www.dbalawyers.com.au). Bryce can be contacted at bfigot@dbalawyers.com.au