The enduring power of attorney can play a vital role in the running of an SMSF, writes Kathleen Conroy.
An enduring power of attorney (EPOA) is an essential document in the suite of documents that comprise a properly packaged and administered SMSF. With superannuants travelling overseas for work or extended holidays, increased SMSF investment in real property and, sadly, rising instances of dementia in Australia, this is arguably more the case now than ever. This article considers why and, more so, how the EPOA and the SMSF sit together as a legal couple.
Powers of attorney – some basics
Broadly, powers of attorney come in two forms – general and enduring. Both are instruments by which one entity – the principal – appoints one or more other persons – the attorney(s) – to do things the principal would otherwise only be able to do under their own hand, for example, withdrawing money from the principal’s bank account or signing a transfer to sell real property registered in the principal’s name. However, and loosely speaking, an EPOA is a step above a general power of attorney in that, unlike a general power of attorney, an EPOA continues to have effect notwithstanding that a principal has lost capacity. This is an essential distinction in the world of SMSFs.
Both a general power of attorney and an EPOA are simple documents to have prepared. Importantly, however, because the EPOA continues once the principal has lost capacity, there are additional requirements for the witnessing of the execution of that document by the principal. Under the relevant statute in Queensland, for example, execution by the principal must be witnessed by an eligible witness, defined at section 31 of that statute as “a justice, commissioner for declarations, notary public or lawyer”, while the principal may only make the EPOA “if the principal understands [its] nature and effect”.
Each Australian state and territory has its own legislation when it comes to powers of attorney, and a power of attorney must be properly made under the relevant legislation. Other important facts to bear in mind when it comes to the power of attorney include:
- to sell real property under the strength of a power of attorney, that document needs to be registered at the land registry in the state or territory where the property is situated,
- an EPOA can only be revoked by the principal while the principal has capacity with respect to the particular power being revoked,
- the power of attorney comes to an end when the principal dies, and
- legislation sets out a number of matters that can result in a power of attorney being revoked, either in full or in part.
When a principal appoints an attorney under an EPOA, the attorney needs to accept that appointment. The acceptance should be made after the principal signs the appointment document, although the same date is permitted. For appointments made under the Queensland Powers of Attorney Act, case law indicates that neither:
- the passing of time between the principal and the attorney signing the document, nor
- the principal losing capacity between the date that the principal signs the document and the date that the attorney accepts the appointment,
- are fatal to the appointment.
The EPOA and SMSF – step 1
Other than in very limited circumstances, a fund will only qualify as an SMSF where each member of the fund is either a trustee of the fund or a director of the fund’s corporate trustee, and it is because of this threshold requirement for existence as an SMSF that the EPOA becomes a very important document for the SMSF member.
How so? Subsection 17A(3) if the Superannuation Industry (Supervision) (SIS) Act 1993 provides that an SMSF will continue to be an SMSF where, among other things:
- 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:
- the member of the fund is under a legal disability; or
- the legal personal representative has an EPOA in respect of the member of the fund.
The term legal personal representative is defined at subsection 10(1) of the SIS Act as follows: ”…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” (my emphasis).
So, in short, under the superannuation legislation:
- the EPOA is the key to allowing a fund to continue to qualify as an SMSF, notwithstanding that the member may not be acting as trustee of the fund, and
- the enduring power of attorney ‘relief’ can be invoked to assist not only when the member is under a legal disability.
However, as also evident from the above, the fact of the EPOA being drawn up, properly signed and sitting in someone’s drawer is not enough.
The EPOA and the SMSF – step 2
Where the attorney is to act for the principal in the context of an SMSF, subject to my further comments below, the principal must resign as a trustee of the fund (or director of its corporate trustee) and the attorney be appointed in the principal’s place. This is pursuant to sub-paragraph 17A(3)(b) of the SIS Act recited above.
As noted by the Australian Taxation Office (ATO):
- “[t]he appointment of the legal personal representative as a trustee and the removal of the member must be in accordance with the [fund’s] trust deed, the SIS [Act] and any other relevant legislation”; and
- where a corporate trustee is involved, any removal and appointment must also be properly made under any constitution for the corporate trustee and the Corporations Act 2001.
If the SMSF has a corporate trustee and the member does not want to step down as a director of that company, provided that the EPOA has been properly drawn for that purpose, the attorney can be appointed as an alternate director on the board of the trustee company. Where the attorney is an alternate director only, the member can stay on as a director of the fund trustee, although, without limitation, the alternate director will only be able to perform the duties of a director while those duties are not being performed by the member director.
Lying underneath the big picture actions that must take place for the appointment of an attorney to office with respect to an SMSF, there are several technical points to consider and, where necessary, address in attorney appointment situations. Without limitation, points to be noted where you are considering the appointment of an attorney as trustee of an SMSF, or a director of its corporate trustee, include the following:
- The appointment of the legal personal representative will only be valid while the underlying instrument for the appointment, that is, the EPOA by which the principal appointed the attorney, is valid.
- The mere fact of the appointment may not be enough in all circumstances to save the fund for the purposes of it qualifying as an SMSF.
- Where any change is made to the officeholders of a company (including a company acting as trustee of an SMSF), the Australian Securities and Investments Commission (ASIC) must be notified of that change on the prescribed form within the requisite time frame. Failure to notify ASIC of the change within the requisite time will result in the imposition of a late lodgement fee.
- By section 118 of the SIS Act, a person will only be eligible to act as the trustee of a fund or a director of its corporate trustee if that person first consents in writing to that appointment.
- A company will have contravened section 201D of the Corporations Act 2001 if it appoints a person as director of the company prior to that person giving the company the person’s signed consent to act as one of its directors.
- Where a person is ineligible to act as either the trustee of an SMSF or a director of its corporate trustee, that person will not be able to assume the office from which the person is barred on the basis that they are the attorney for a fund member under an EPOA.
More generally, the ATO is of the view that one-for-one substitution is not essential when it comes to a member using an EPOA as the basis for the appointment of a person in place of the member as fund trustee or director of the fund’s corporate trustee. Thus, for example, “where one member has granted an enduring power of attorney to more than one person, one or more of those people can be appointed as trustee or director in place of the member”. Importantly, with this example it is necessary to consider the effect of an appointment of attorneys being ‘joint’ or ‘several’.
When a person is acting as trustee of a fund, or the director of a corporate trustee, that person is not relieved of any of the obligations otherwise applying to people administering the SMSF. The legal personal representative will, that is, bear all the burdens of a fund trustee. Again, in the words of the ATO: “… as the legal personal representative is acting in a personal capacity as a trustee of the SMSF, the legal personal representative is subject to civil and criminal penalties for any breaches of their duties under the SIS [Act] or other legislation. Likewise, a legal personal representative who is a director of the corporate trustee is also subject to civil and criminal penalties for breaches of the SIS [Act] and the Corporations Act”.
In these circumstances, it is vital that a person who is considering stepping forward to act as trustee or director of a corporate trustee for an SMSF in circumstances where the member is unable or unwilling to perform the usual trustee duties, first steps back and properly considers the role about to be undertaken. Without limitation, the volunteer should take advice on the duties and obligations of the office under consideration and whether they have the time, ability and inclination to properly undertake those duties. Similarly, a principal should think long and hard about who the principal appoints as the principal’s attorney(s), where any attorney is to be a candidate for running the principal’s SMSF.
The EPOA has been in use for many years. Without limitation, it allows for a person’s affairs to be properly conducted with minimum fuss where that person is either unable or unwilling to conduct those affairs directly. It is not a legal requirement for SMSF members. If, though, an SMSF member fails to make an EPOA that allows the attorney to be appointed to run the fund in the absence of the member, the member has ignored a tool that could save the fund from disqualification as an SMSF. That could be very expensive, and really is not all that bright.