Self-managed super funds (SMSF)s and incapacity: What happens if a SMSF member loses capacity?

With an ageing population and the maturing of self-managed super funds (SMSF)s, incapacity is an issue being faced more frequently by trustees and members of SMSFs.  

Incapacity poses several difficulties for member and trustees of SMSFs, not least because every SMSF member must be a trustee (or the director of a corporate trustee of the SMSF). So, what happens when a member loses capacity? And what can you do now to protect the smooth running of your SMSF should incapacity affect a member of your fund?

Can a member who lacks capacity still be a trustee or director of a corporate trustee company?

Loss of capacity does not affect membership in a SMSF in circumstances where the SMSF Deed allows the member who lacks capacity to be removed from the position of trustee of the SMSF (or director of the corporate trustee). Do you know what your Deed says?  

Taking steps now to ensure this is possible could alleviate problems later. The Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) allows an Enduring Power of Attorney (EPOA) to act on behalf of a member.  This means that EPOAs can be an extremely useful tool in reducing the potential for future problems arising because of a member’s loss of capacity. 

Having an SMSF Deed which does not deal adequately with the removal of a trustee or not having an EPOA can have major impacts on the smooth running of the SMSF.

Do SMSF members need Enduring Powers of Attorney (EPOAs)?

Having an EPOA is a crucial step in avoiding problems for your SMSF arising in circumstances where a member loses capacity.  

Do you have an up to date, valid EPOA?  If not, you should consider putting one in place to avoid the inevitable difficulties which arise for you and your SMSF where a member who loses capacity and has no EPOA in place.

No EPOA, no capacity – then what?

It is likely that an application for the appointment of a substitute decision-maker would need to be made in the relevant state or territory. In Queensland, for example, this would mean an application being made to the Queensland Civil and Administrative Tribunal (QCAT). This is likely to be time-consuming and costly. In addition, there also exists the risk of competing applications and/or an appointment outside the family especially in circumstances where there is conflict or even the perception of conflict. Here, the Tribunal may look to appoint an independent person or entity, such as the Public Trustee. 

There is also the option for the SMSF to become a small APRA fund but depending on circumstances, this may not be an attractive option for many.

Finally, as undesirable as it may be, there is the possibility of the incapacitated member being rolled out of the SMSF. Such action should only occur after legal, taxation and financial advice regarding the potential consequences and within any relevant time limits. Such consequences to consider include capital gains tax and/or the liquidation of assets within the SMSF.

Who has control of the SMSF after a member loses capacity?

This depends on a lot of ‘what if’s’ including:

1. Are there individual trustees or is there a corporate trustee company?
2. Is there an EPOA for the incapacitated member?
3. What does the SMSF Deed say about the appointment of trustees?
4. If there is a corporate trustee, then what will happen to the shares of the incapacitated member?
5. What does the Constitution of the corporate trustee about the position of director in the circumstances?
6. What effect (if any) does a loss of capacity have on voting rights within a corporate trustee company?
7. If there is no EPOA, who should apply to the State / Territory Tribunal (for example, QCAT or VCAT etc.) to be the Administrator for the incapacitated member to manage their financial affairs including their interest in the SMSF?

Working out the answer to these questions before a member loses capacity simplifies the management of the SMSF if member incapacity occurs.  It offers certainty around the succession plan for the SMSF and it reduces the risk of a family dispute arising as a result of incapacity.  For many, superannuation is one of, if not the, most significant asset they have.  Ensuring that it can continue as you expect after a significant event such as member incapacity is essential.  The best way to achieve this is to seek financial and legal advice from specialist advisors who understand not only the complexities of SMSFs but the layers of complexity that incapacity can add.

If you would like to discuss any of the issues raised in this article then contact Rebecca Edwards, Special Counsel.