30/08/2010

Trustee sustainability is an ongoing issue for self managed superannuation funds (‘SMSFs’) due to the requirement of the Superannuation Industry (Supervision) Act 1993 (‘SIS Act’) that a member must be a trustee or a director of the corporate trustee to meet the definition of SMSF.

Following finalisation of SMSF Ruling 2010/2 (‘the Ruling’) by the Australian Taxation Office (‘ATO’), SMSFs can definitively use the Enduring Power of Attorney to address this issue.  The Ruling clarified the scope and application of the SIS Act provisions that allow a legal personal representative (‘LPR’) who holds an Enduring Power of Attorney from the member to act as trustee or director of the corporate trustee in place of the member.  This is an exception to the member-trustee requirement of the SMSF.

The ATO also considers that the LPR appointed under the Enduring Power of Attorney acts as trustee or director of the corporate trustee in their own right and is not an agent of the member in their trustee position.  This is in particular a relief to members who are ageing or who no longer wish to assume the trustee responsibilities but wish to remain as members of their SMSFs.  Trusted individuals and family members may be appointed as trustee or director of the corporate trustee in their place.

The ATO also confirmed that SMSF members going overseas indefinitely (becoming non-resident) may appoint resident individuals as their LPR. The LPR would take over as trustee or director of the corporate trustee and the fund will continue to meet the central management and control test of Australian superannuation funds, a SMSF requirement.  However, the fund will have to meet the “active member” test of Australian superannuation funds.

The ATO also confirmed that SMSF members going overseas indefinitely (becoming non-resident) may appoint resident individuals as their LPR. The LPR would take over as trustee or director of the corporate trustee and the fund will continue to meet the central management and control test of Australian superannuation funds, a SMSF requirement.  However, the fund will have to meet the “active member” test of Australian superannuation funds.

In addition, the ATO also interpreted the use of multiple attorneys, single attorney and alternate director in the LPR context favourably.

• If the trustee is a corporate trustee, it is possible to appoint a LPR as the alternate director.  The appointing member will continue as a director and the alternate director will only act when the original director is not acting in the director capacity.
• An Enduring Power of Attorney can be executed in favour of multiple attorneys. One or more of the attorneys can be appointed as a trustee, or a director of the corporate trustee, in place of the member.
• Similarly, multiple members can execute an Enduring Power of Attorney in respect of the same LPR.
• A member can also execute an Enduring Power of Attorney in favour of an existing member.  For example, in a two-member SMSF, one member can appoint the other member as the LPR under an Enduring Power of Attorney.

Specific requirements

The appointment of LPR using the Enduring Power of Attorney is a specialised area of SMSF.  The Enduring Power of Attorney must be current and there are other legal requirements to be met.

• If an LPR is appointed, the existing member must cease to be the trustee or director of the corporate trustee, except if the LPR appointed is an alternate director.

- The appointment of the LPR and the removal of the existing member as the trustee must be made in accordance with the trust deed, the SIS Act and other relevant legislation.  In some cases, amendment of the trust deed may be required.

- If the trustee is a corporate trustee, the appointment of the LPR as a director and the removal of the member as the director must be made in accordance with the corporate trustee’s constitution and the Corporations Act 2001 and other legal requirements.

• An Enduring Power of Attorney must be made in accordance with the relevant State or Territory Legislation and must be current.
•  At the time of making the power of attorney, the member must have legal capacity and understand the effect of making the Enduring Power of Attorney.  Executed properly, the Enduring power of attorney survives the incapacity of its donor and will continue to operate in the event of the member becoming incapacitated.
• Processes to appoint and remove trustees have to be implemented including execution of trustee consent, trustee declarations, minutes of meeting and lodgement of relevant forms with the ATO and the ASIC.

It is important to note that if a member is disqualified from acting as trustee, for example, becoming bankrupt, the LPR provisions of the SIS Act will cease to operate.  If this is the case, the fund will no longer meet the SMSF definition.

TOWNSENDS BUSINESS & CORPORATE LAWYERS has created a package of documents necessary of the appointment of Enduring Powers of Attorney in the SMSF context which comply with the Ruling.  We have separate documents available for each State of Australia.  For assistance in this area please contact us on    (02) 8296 6222.