Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 487

SMSF trustees who question their capacity and look for options

John and Mary have an SMSF with a corporate trustee and are the current members of their SMSF.

They are both seriously questioning their capacity to continue operating the SMSF as trustees and directors and have an enduring power of attorney where they have appointed the NSW Trustee and Guardian to act as her attorney.

John and Mary want to know whether the NSW Trustee and Guardian can be appointed as a director of the corporate trustee of the SMSF when Mary no longer has mental capacity.

The definition of a self-managed superannuation fund contained in s17A(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘the SIS Act’) applies to funds with more than one member.

It states among other things that if the trustees of the fund are individuals that each individual trustee of the fund must be a member of the fund and each member of the fund must be an individual trustee.

On the other hand, if the trustee of the fund is a corporate trustee, then each director of the corporate trustee of the fund must be a member of the fund and each member of the fund must be a director of the corporate trustee.

Section 17A(3) of the SIS Act provides some exceptions to this. It provides that an SMSF will continue to qualify as a self-managed fund if the “legal personal representative” is a trustee of the fund or a director of the corporate trustee of the fund during any period when the member is under a legal disability.

The term “legal personal representative” is defined in the SIS Act to include “the executor of the will or administrator of the estate of a deceased person, the trustee of the estate of a person under a legal disability or a person who holds an enduring power of attorney granted by a person”.

In the event that they no longer have mental capacity, a legal personal representative must be appointed as a director of the corporate trustee of the fund so that the fund continues to satisfy the definition of a self-managed superannuation fund under s17A of the SIS Act.

The question is whether the NSW Trustee and Guardian can be appointed as a director of the corporate trustee of the SMSF when John and Mary no longer have mental capacity.

The SIS Act defines an “individual trustee” to mean “an individual who is a trustee of the fund”.

Section 201B(1) of the Corporations Act 2001 (Cth) (“the Corporations Act”) states that only an individual who is at least 18 may be appointed as a director of a company.

The NSW Trustee and Guardian does not meet the definition of an “individual trustee” as defined in the SIS Act and cannot be considered an “individual” for the purpose of s201B(1) of the Corporations Act. Instead, it is a statutory corporation, and its status is that of a NSW government agency.

Therefore, the NSW Trustee and Guardian cannot be appointed as a co-trustee of an individual trustee fund or as a director of a company. Where the trustees of the fund are individuals the NSW Trustee and Guardian may formally appoint either a delegate or its delegate may sub-delegate an individual as a co-trustee of an individual trustee fund.

Solution 1

As John and Mary’s SMSF is a corporate trustee structure, the NSW Trustee and Guardian may also formally appoint a delegate, or its delegate may sub-delegate an individual to act as a director who is authorised to exercise in part the powers and functions conferred on the NSW Trustee and Guardian.

It is important to note that s11(1) of the Trustee and Guardian Act 2009 (NSW) (“the Trustee and Guardian Act”) empowers the NSW Trustee and Guardian to act in its capacity as a trustee, agent or attorney. Section 11(3B) of the Trustee and Guardian Act also permits the NSW Trustee and Guardian to “prepare instruments that create powers of attorney and carry out professional services in connection with powers of attorney”.

Section 57(1) of the Trustee and Guardian Act reinforces that the NSW Trustee and Guardian “has, and may exercise, all the functions the person or patient has and can exercise or would have and could exercise if under no incapacity”.

The NSW Trustee and Guardian may rely on sections 11(3B) and 57(1) of the Trustee and Guardian Act to create an enduring power of attorney (as required under s17A(3)(b)(ii) of the SIS Act) on behalf of John and Mary to appoint an individual to act as their enduring attorney so that the appointment satisfies the definition of a legal personal representative under the SIS Act.

Solution 2

Alternatively, the NSW Trustee and Guardian could delegate an individual to take up the role as director of the corporate trustee of the fund. The appointment of the individual as a director of the corporate trustee would also need to satisfy the definition of a legal personal representative under the SIS Act for the fund to continue to satisfy the definition of a self-managed superannuation fund.

Conclusion

Importantly, if an individual cannot be appointed who satisfies the definition of a legal personal representative, then their interest in the fund may need to be rolled out of the fund to ensure that the status of the fund satisfies s17A of the SIS Act.

The governing rules of a fund’s trust deed should also be reviewed when it comes to who can be appointed as a trustee/director of a fund. The governing rules of a fund will usually mirror the SIS Act requirements in relation to the appointment of a trustee/director of a fund and contain provisions when it comes to who can act as a legal personal representative of a fund and when a person ceases to be a member and trustee/director of a fund.

John and Mary should also refer to the corporate trustee’s constitution to determine whether Mary’s office of directorship will automatically vacate once she becomes mentally incapacitated. Generally, a person will remain as a director of a company even if they no longer have mental capacity and are unable to exercise their functions and powers as a director. This is somewhat reflected in Chapter 2D of the Corporations Act and seems to suggest that the office of directorship does not automatically cease when a director can no longer exercise their functions, powers, and rights as a director of a company.

Therefore, if the NSW Trustee and Guardian creates an enduring power of attorney which appoints an individual to act as Mary’s enduring attorney and that individual satisfies the definition of a legal personal representative under the SIS Act then John, in his capacity as a director of the corporate trustee of the fund, would be required to formally appoint that individual as a director and remove Mary as a director to ensure that the status of the fund complies and satisfies s17A of the SIS Act.

 

Elizabeth Wang Is a superannuation lawyer with Townsends Business & Corporate Lawyers. Please note that these comments are for your consideration only and are provided to assist you in deciding whether to proceed to obtain a formal opinion on the issue. These comments cannot be relied upon by either you or any of your clients until and unless we issue that formal opinion.

 

6 Comments
John
December 08, 2022

It's hard to endorse NSW TAG as a preferred option in this situation, or almost any situation. They have an appalling reputation, making it very hard for people to access their own funds.

Margaret
December 07, 2022

We had an SMSF with a corporate trustee for nearly 40 years and researched this issue some years ago. Everyone's circumstances are different but in view of our advanced age we decided to change it to an SAF - Small Apra Fund -and are very happy to be free of the burden of the legal responsibility of Trustees. We continued on with our trusted financial advisor who still manages the investments and we still have control over the asset allocations and if we become impaired our Powers of Attorney will be able to take over that function. I would question the costs of any options that may be open to you.

John Derrett
December 07, 2022

NSW Trustee & Guardian may be a solution for aged SMFS trustees, but the returns would have to be really worth it c/w a commercial super fund. As one ages, it is all about simplifying your affairs for yourself or your beneficiaries.

That does not include using NSW T&G, as whilst they may be ideal for the poorly informed, on a pension with a rented house, they are way too costly for anyone who owns a house in a capital city, let alone having any superannuation!
I would implore anyone to look very carefully at the charges NSW T&G levy and their “less than glowing” reputation for fast efficient service.
My personal experience indicates that the local solicitor beats them hands-down on both cost and efficiency.

Albert
December 07, 2022

Practical conclusions in the context of retaining a SMSF :
1. for a SMSF with individual trustees : Appoint the incapacitated trustee's EPA holder to take the office of Trustee eg. adult children holding the EPA
2. for a SMSF with corporate trustee : Appoint the EPA holder to be director of the Corporate Trustee.

So give a joint EPA to your child and husband. Not just your husband ( since he is already a SMSF Trustee)

Otherwise:
1. incapacitated member to exit the SMSF altogether. Reasonable given that death is getting close and tax is waiting for your death.

John
December 07, 2022

If they are seriously questioning their capacity to continue operating the SMSF. Then it is time to wind the SMSF up and close it down. Maybe then transfer the funds to a good performing industry fund !!

Bakker
December 10, 2022

Agree..wind up and transfer to an industry fund…We will face a similar situation down the track and while we could go with some of the suggested alternate adjustments , why not free your self of the burden altogether at the appropriate time and simply matters in the final stretch.

 

Leave a Comment:

     

RELATED ARTICLES

Clime time: Asset allocation decisions for SMSFs

Why it’s better to be a small investor

SMSFs during COVID-19 and your 14-point checklist

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

The best strategy to build income for life

Owning quality, dividend-producing industrial shares is key to building a decent income stream. Here is an update on the long-term performance of industrial stocks against indices, listed property, and term deposits.

Are more taxes on super on the cards?

The Government's broken promise on tax cuts has prompted speculation about other promises that it may consider breaking. It's widely believed that super is lightly taxed and a prime candidate for special attention.

Lessons from the battery metals bust

The crash in lithium and nickel prices has left companies scrambling to cut production, billionaires red-faced, and investors wondering how a ‘sure thing’ went so wrong. There are plenty of lessons for everyone.

Welcome to Firstlinks Edition 545 with weekend update

It’s troubling that practical skills like investing aren’t taught at schools as it leaves our children ill-equipped to build wealth, and more vulnerable to bad advice. Here are some suggestions to address the issue.

  • 1 February 2024

For the younger generation, we need to get real on tax

The distortions in our tax system have been ignored for too long, and we're now paying the price. It's time Australia got real and addressed the problems to prevent an even greater intergenerational tragedy.

Latest Updates

Shares

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

Investment strategies

Clime time: 10 charts on the outlook for major asset classes

The charts reveal that interest rates can't rise much further as Australian mortgage holders are under stress, bank dividends look solid, and the bond market is in flux because yields are being manipulated.

Strategy

Phasing out cheques, and what will happen to cash?

Cheques and bank service, or the lack of, were major topics when I addressed a seniors’ group recently. The word had got out that the government was phasing out cheques, and many in the audience were feeling abandoned.

Retirement

What financial risks do retirees face?

Treasury's consultation into the retirement phase of superannuation is generating a lot of interest. This submission to the consultation outlines the key financial risks to an individual’s standard of living in retirement.

Shares

Recession surprise may be in store for the US stock market

Markets are partying like it's 1999, but history suggests that US earnings and economic growth are vulnerable following an interest rate tightening cycle. Investors should prepare their portfolios accordingly.

Investment strategies

3 under the radar investment opportunities

The Magnificent Seven are hogging the headlines, yet there are plenty of growth opportunities elsewhere, at a fraction of the cost. Here are three stock ideas riding key areas of structural and cyclical change.

Shares

Why a quant approach can thrive in the age of passive investing

The rise of passive investing is unlikely to derail the value of quantitative strategies. Passive investing hasn’t eradicated the irrationality of crowds, leaving pockets of opportunity to outperform indices.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.