Losing capacity: The issues for SMSF trustees and what you need to do

For an SMSF with individual trustees, the trust deed will include wording like the following:

“Subject to the Law, a Trustee ceases to act as an individual trustee if they die or otherwise lose legal capacity.”

Based on the above wording, the individual in question would remain as a member of the fund, but they would no longer be able to act as a trustee, resulting in the SMSF failing to meet the basic definition of an SMSF.

Corporate trustee

For an SMSF with a corporate trustee, the wording of the company constitution would, in most cases, set out that a director is automatically removed when they lose capacity.

The following has been sourced from the constitution of a company that acts solely as a Trustee for an SMSF:

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The result in this case is that the individual in question remains a member of the fund, but they can no longer act as a director of the corporate trustee, which again leads to the SMSF failing to meet the basic definition of an SMSF.

A growing problem?

Unfortunately, the loss of capacity is predicted to be more prevalent as the population ages and more Australians live with mental illness and dementia. As at 30 June 2025, almost 40% of all SMSF members were aged 65 or more. Around 17% were over 75.

It’s important to note that unless other evidence exists, we should always assume that a person does have the capacity to act.

There are certain events, however, that would raise concerns about a person’s capacity. These could include brain injury due to accident or illness, a mental illness, a stroke and, of course, dementia.

Safeguarding your SMSF

There are certain measures you can put in place to safeguard your SMSF or, at the very least, provide you and the other members of the fund with options at the appropriate time.

One of these measures is to require all members of the SMSF to have an enduring power of attorney (EPOA).

An EPOA allows someone you have nominated to step in and act as a trustee or director on your behalf if you are unable to carry out this role.

The superannuation legislation allows this to occur with specific wording in Section 17A of the SIS Act:

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This requires appropriate documentation to be drafted and put in place, so it’s generally advisable to engage a legal professional. They can ensure you achieve the right outcomes for your personal situation. Your legal adviser should also review all the relevant documentation for your SMSF to make sure it allows the appointment to take place.

As you are essentially allowing someone else to take control of your retirement savings, you need to think carefully about the most appropriate person for this role. In many cases, a spouse is appointed, and this can work even if they are already a member of the fund. That’s because it’s possible to act as a trustee/director for yourself and for other members.

In some situations, it may be appropriate to appoint more than one person as your (enduring power of) attorney and be involved in any decision-making process. This can create issues around efficient decision-making, but it may still be worth discussing with your legal adviser should you see the need.

What if there is no one to take over?

If no one is appointed who can automatically take over the control of your SMSF, your family or professional advisers may need to apply to the appropriate court or tribunal to appoint someone to act in the required capacity.

The issues that arise from this include:

• The fund may no longer meet the requirements to be an SMSF for the period where the individual remains as a member but is not a trustee or director
• The time it takes to complete and the costs incurred with applications made to the courts
• The court or tribunal may appoint the public trustee to fulfil the trustee role.

Points to note

1. Put in place the required documentation prior to any loss of capacity. The earlier this issue is addressed, the better.
2. Always refer to the SMSF trust deed and, where applicable, the constitution of the fund’s corporate trustee. These documents will set out the rules and requirements specific to your SMSF. Do they allow someone else to act in your place? If you update your trust deed/fund documentation in the future, make sure consideration is given to any existing EPOA arrangements.
3. Review these arrangements regularly to ensure they are still valid and the nominated person is still appropriate. Are they still willing and able to act for you if needed? Do they still have the required capacity?
4. The EPOA appointment into the trustee/director role is not an automatic process. When a member loses capacity, the EPOA holder must be formally appointed as a trustee or director, and the member will need to be formally resigned from this position. This will require trustee minutes and other documentation to be completed at the time.
5. If your fund has individual trustees, you may need to change the name on all assets that the fund owns to reflect the new trustees of the fund. You will also need to update the Australian Taxation Office (ATO) with any changes in details for the fund.