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A radical SMSF approach – part three
In the third part of this series, Grant Abbott, founder of LightYear Docs, continues exploring the possibility of a multiple-member SMSF with a single trustee structure.
In the first two instalments of this series on a new radical way of running an SMSF, I acknowledged some common reasons why SMSF members would be reluctant to act as trustees of the fund. These included nervousness around the ability to be sued and the mental capacity of older individuals.
As I have alluded to there is a solution at hand and it begins with a statement that will change many people’s deep-seated beliefs on what is required to have a compliant SMSF: not all trustees must be members of an SMSF and also not all members must be a trustee of an SMSF.
My authority for this statement is section 17A(3) of the Superannuation Industry (Supervision) (SIS) Act 1993 and also numerous ATO guidelines. And let’s face it, who am I, or for that matter any lawyer, compliance officer, accountant, planner or auditor, to argue against it?
The law
Section 17A provides a definition of what an SMSF is and provides in subsection (1) that all members must be trustees and all trustees must be members. So, no joy there to back up the argument. In fact, it is exactly the opposite.
But section 17A(3) provides as follows:
(3) A superannuation fund does not fail to satisfy the conditions specified in subsection (1) or (2) [that basically require a member to be a trustee or director of a corporate trustee] by reason only that:
(a) a member of the fund has died and the legal personal representative of the member 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 the period:
(i) beginning when the member of the fund died, and
(ii) ending when death benefits commence to be payable in respect of the member of the fund, or
(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.
The definition of legal personal representative in section 10(1) of the SIS Act says:
“Legal personal representative means 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.”
The ATO’s view
Let’s see what the commissioner of taxation has to say publicly on members not being trustees or a director of a corporate trustee.
ATO Community Forum
Trustee question:
My wife and I are the sole members of our family SMSF. Both of us are trustees. My wife is having some health issues where she may not be capable of making her own financial decisions in the future. If she establishes a power of attorney and appoints me as the attorney, what impact will this have on our SMSF if I invoke the power of attorney? Specifically, can my wife remain as a trustee? If she is not able to remain as a trustee, can she remain a member of the fund? Is it possible to appoint another family member as a trustee without that person being a member of the fund?
ATO response:
Generally speaking, a legal personal representative who holds an enduring power of attorney granted by a member may be a trustee of the SMSF, or a director of the corporate trustee of the SMSF, in place of the member without causing the fund to fail to satisfy the definition of an SMSF.
Self-managed superannuation funds ruling SMSFR 2010/2 – Self-Managed Superannuation Funds: the scope and operation of subparagraph 17A(3)(b)(ii) of the Superannuation Industry (Supervision) Act 1993, explains the commissioner’s views. In particular, paragraph 17 states:
“A member can execute an enduring power of attorney in favour of an existing member who is a trustee, or director of the corporate trustee, in their own right. In that case, the donor member can cease to be a trustee, or a director of the corporate trustee, and the legal personal representative will be considered to be appointed in their place for the purposes of sub-paragraph 17A(3)(b) (ii).”
In other words, the donor member must resign as trustee, but can remain a member of the SMSF. This does not contravene subsection 17A(1) because it is considered that there are two trustees as the trustee is replacing the donor trustee. The resignation of the member as a trustee must be in accordance with the trust deed. The SMSF’s trust deed must allow for the appointment of the legal personal representative, holding the power of attorney, as a trustee.
SMSFR 2010/2
The commissioner states the following:
Under sub-paragraph 17A(3)(b)(ii) a legal personal representative who holds an enduring power of attorney granted by a member may be a trustee of the SMSF, or a director of the corporate trustee of the SMSF, in place of the member without causing the fund to fail to satisfy the definition of an SMSF.
A person who holds an enduring power of attorney for a member qualifies as a legal personal representative. In order to comply with sub-paragraph 17A(3)(b)(ii), the legal personal representative must be appointed as a trustee of the SMSF, or a director of the corporate trustee of the SMSF. The member must cease to be a trustee of the SMSF or a director of the corporate trustee except where the legal personal representative is appointed as an alternate director.
The appointment of the legal personal representative as a trustee and the removal of the member must be in accordance with the trust deed, the SIS Act and any other relevant legislation. The appointment of the legal personal representative as a director of the corporate trustee and the removal of the member from this position, must be in accordance with the constitution (if any) of the corporate trustee, the SIS Act and the relevant provisions of the Corporations Act 2001.
Where an enduring power of attorney is executed in favour of multiple attorneys, one or more of those 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 legal personal representative who can be appointed as a trustee, or a director of the corporate trustee, in place of each of those members. (This means we can have a four-member superannuation fund with only one trustee who holds the others’ enduring powers of attorney and the fund would still meet the membership requirements of an SMSF.)
Finally, a member can execute an enduring power of attorney in favour of an existing member who is a trustee, or director of the corporate trustee, in their own right. In that case, the donor member can cease to be a trustee, or a director of the corporate trustee, and the legal personal representative will be considered to be appointed in their place for the purposes of sub-paragraph 17A(3)(b)(ii).
Example 1
Andrew works for a large international group of companies. He and his wife, Jane, are trustees and members of their SMSF. From 1 February 2009, Andrew is transferred to an overseas company for an indefinite period of time. In accordance with the relevant state legislation, Andrew and his wife each execute an enduring power of attorney in favour of their friend and retired accountant, Trevor. In addition, Andrew and Jane both resign as trustees of their SMSF and appoint Trevor as the trustee. The appointment of Trevor as trustee is in accordance with the terms of the trust deed. Other than the fact that Andrew and Jane are not trustees of the SMSF, the superannuation fund satisfies the other requirements of the definition of an SMSF in subsection 17A(1).
Trevor is a legal personal representative of both of the members, Andrew and Jane, by virtue of holding an enduring power of attorney in respect of each of them. In addition, Trevor is now the trustee of the SMSF in place of both Andrew and Jane. Once appointed as trustee, Trevor is subject to civil and criminal penalties in the event he breaches his duties. Provided the enduring power of attorney remains valid during the period Trevor is the trustee and given that the other requirements of sub-paragraph 17A(3)(b)(ii) are satisfied, the superannuation fund continues to satisfy the definition of an SMSF in subsection 17A(1), notwithstanding that Andrew and Jane are no longer trustees.
Example 2
Clare runs a single-member SMSF. The trustees of the SMSF are Clare and her daughter, Jan. Clare has found that, as she nears retirement, the responsibilities of being a trustee of the SMSF have become too difficult and time consuming for her. She executes an enduring power of attorney for Jan in accordance with state legislation. Clare resigns as a fund trustee, leaving Jan as the sole remaining trustee. Other than the fact Clare is not a trustee of the SMSF, the fund satisfies the other requirements of the definition of an SMSF in subsection 17A(1).
Putting it into practice
There you have it, not all members must be trustees and not all trustees must be members. So next time it comes around to client review time, take a long hard look at each of the trustees or corporate directors of the SMSF and offer them the opportunity, after explaining how the commissioner is becoming increasingly demanding of trustees and that they may be better off leaving only one or two members in the firing line as trustee or director. This also saves you as an adviser as you will only be dealing with those individuals in the fund who have the understanding and ability to act as a trustee.
But to do it put everything else in place:
1. Check the current deed and if it is inadequate around legal personal representatives acting as trustee, then upgrade it. The last deed I wrote for LightYear Docs was worded as follows: “If a member of the fund becomes incapacitated, or chooses to no longer act as trustee while remaining a member of the fund, the member’s legal personal representative is to be automatically appointed as a replacement trustee if there is no corporate trustee.”
2. For a corporate trustee, an enduring power of attorney cannot install a replacement director by the donor member. It must be in the constitution. The special purpose SMSF corporate trustee constitution I authored for LightYear Docs provides for a successor director to act on behalf of the member. It also requires a special binding resolution by current directors to install the successor director in the event of incapacity or resignation of the member as director.
If there is no current procedure in the fund’s special purpose company constitution, then upgrade it to allow for the successor director to take the place of the current director during their life and on their death. This is a successor director solution, not the alternative director solution noted by the commissioner in SMSFR 2012/2, due to the fact the alternative director role ceases on death and we still want continuity after death to pay out death benefits immediately.
3. The enduring power of attorney should have a specific clause, after G v G (No 2) [2020] NSWSC 818, enabling a replacement trustee to be put in place such as: “The attorney is authorised to act on behalf of the principal for the superannuation fund or superannuation funds, including acting as a replacement trustee or replacement director while this enduring power of attorney is valid and the principal has consented to them acting as such.”
The issue of having only cognisant, aware and savvy members acting as trustee or director of the corporate trustee is as much about asset protection as it is about estate and incapacity planning.
