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Mental illness and loss of capacity affect millions of Australians every year, yet these issues don’t receive the coverage and attention they deserve.
What we often overlook are the flow on issues that occur where the capacity of an individual diminishes and where that individual acts in other roles, for instance as a director of a company or as a trustee of a trust including a self-managed super fund (SMSF). The effects on these entities can be significant and, in some cases, can jeopardise the retirement savings of the individual and other members of an SMSF.
In this article we will look at how we can reduce this risk by implementing simple yet effective safeguards.
A fundamental requirement for all SMSFs is that every member of the fund must also act as a trustee for the fund or as a director of the corporate trustee. This ensures that each member has a say in the way their retirement savings are managed and that every member is responsible for the ongoing compliance of the fund.
If this fundamental requirement is not satisfied, the fund will fail to meet the definition of an SMSF, which could eventually lead to the loss of tax concessions the fund would otherwise receive.
The trustee appointment rules are usually addressed on the establishment of the SMSF, with the appointment of all members into the appropriate position as trustee or director. But keep in mind that this is an ongoing requirement; that all members remain as a trustee or director for the entire period that they remain as a member of the fund.
As you would expect, if an event occurs that precludes a member from acting as a trustee, it can create a major problem for all members of the SMSF, not just themselves.
One such event is the loss of capacity.
The wording of most SMSF trust deeds will include rules that come into effect if a member does lose their capacity to act in their role as a trustee or director.
For an SMSF with individual trustees, the trust deed will include wording similar to 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.
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 Trustee for an SMSF:
“A director automatically ceases to be a director if any of the following applies:
- The director becomes of unsound mind or a person who is, or whose estate is, liable to be dealt with in any way under any law relating to mental health”
The result in this case is that the individual in question remains as 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 a SMSF.
A growing problem?
Unfortunately, the loss of capacity is predicted to be more prevalent as the population ages and an ever-increasing number of Australians live with mental illness and dementia.
It is 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 result in concerns being raised over a person’s capacity. These could include brain injury as a result of an accident or illness, a mental illness, a stroke and, of course, the effects of dementia.
Safeguarding your SMSF
There are certain measures that you can put in place to safeguard your SMSF or, at the very least, measures that may provide you and the other members of the fund with additional options at the appropriate time.
One of these measures is to require all members of the SMSF to have in place an enduring power of attorney (EPOA).
An EPOA allows another person you have nominated to step in and act as a trustee or director on your behalf if and when you are unable to carry out this role. The person you have nominated then takes on the role and responsibility of being the trustee for your SMSF.
The superannuation legislation allows this to occur with specific wording that is included under Section 17A of the SIS Act:
Certain other persons may be trustees
(3) A superannuation fund does not fail to satisfy the conditions specified in subsection (1) or (2) by reason only that:
(b) The legal personal representative of a member of the fund is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during any period when:
(i) The member of the fund is under a legal disability; or
(ii) The legal personal representative has an enduring power of attorney in respect of the member of the fund
This requires appropriate documentation to be drafted and put in place, so it is generally advisable to go through this process with a legal professional. They can then address your personal situation and ensure that you achieve the right outcomes. Your legal adviser should also review all the relevant documentation for your SMSF to make sure that these allow 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 themselves. 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 consider having more than one person appointed as your (enduring power of) attorney and require all to be involved in any decision-making process. This can of course create other issues around efficiencies in decision making but it may be worth discussing with your legal adviser should you see the need.
- You should address these measures and put in place the required documentation prior to any loss of capacity. The earlier this issue is addressed the better.
- 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 that are 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 that consideration is given to any existing EPOA arrangements.
- It is important to review these arrangements regularly to ensure they are still valid. You should always consider whether 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?
- The EPOA appointment into the trustee/director role is not an automatic process. When a member loses capacity, the EPOA holder will need to 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.
- If your fund has individual trustees, you may need to change the name on all assets that the fund owns to correctly reflect the new trustees of the fund. You will also need to update the ATO with any change in details for the fund.