Examining an enduring power of attorney when a member has lost capacity

CaseWare SMSF AuditCaseWare SMSF Audit

SMSF Audit Technical Issues Series

In this blog series, CaseWare’s SMSF Audit expert and content provider Sharlene Anderson, outlines common technical SMSF issues, and what auditors need to consider for each. This is the fifth issue of six.

Examining an enduring power of attorney when a member has lost capacity

A fund does not fail to meet the definition of an SMSF if a legal personal representative of a member is a trustee of the fund or a director of a corporate trustee in place of the member during any period when the legal personal representative has an enduring power of attorney in respect of the member of the fund. A person who holds enduring power of attorney for a member qualifies as a legal personal representative (Paragraph 6 SMSFR 2010/2, section 10 SIS Act).
ATO Ruling SMSFR 2010/2[1] brought clarity to the ATO interpretation of what is meant by ‘in place’ of the member. Paragraph 7 of the ruling confirmed that the legal personal representative must be appointed as a trustee of the SMSF or a director of the corporate trustee and that 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 ruling states:

  1. 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 SISA and any other relevant legislation.
  2. 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 SISA and the relevant provisions of the Corporations Act 2001 (Corporations Act).
  3. A member who is a director of the corporate trustee may also appoint their legal personal representative holding an enduring power of attorney as an alternate director in their place in accordance with the corporate trustee’s constitution or section 201K of the Corporations Act. If the legal personal representative is appointed as an alternate director, he or she must be so appointed in their own right and not as the member’s agent. In addition, the terms of the appointment must only empower the legal personal representative to act as a director when the member is not performing those duties themselves. The member is not removed from the position of director in these circumstances.
  4. The legal personal representative performs their duties as a trustee of the SMSF, or a director of the corporate trustee of the SMSF, pursuant to their appointment to that position rather than as an attorney or agent for the member. Consequently, any proscriptions contained in State or Territory legislation against conferring trustee duties and powers via a power of attorney or common law restrictions on attorneys undertaking directors duties are not relevant to the application of the exception contained in subparagraph 17A(3)(b)(ii).
  5. Further, 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 SISA 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 SISA and the Corporations Act.
  6. The enduring power of attorney must be current and accord with the relevant State or Territory legislation relating to enduring powers of attorney at all times during which the legal personal representative is a trustee, or a director of the corporate trustee, of the SMSF in place of the member.
  7. Where a member is disqualified from being a trustee, or a director of the corporate trustee, of an SMSF under section 120, subsection 17A(10) prevents the exceptions in subsection 17A(3) from applying in respect of that member. Consequently, the exception in subsection 17A(3)(b)(ii) will not apply and the superannuation fund will cease to satisfy the definition of an SMSF under subsections 17A(1) or 17A(2).
  8. 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.
  9. 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.
  10. 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 subparagraph 17A(3)(b)(ii).

Several examples are given in the ruling and are reproduced below:

Example 1

  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).
  2. 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 that he breaches his duties. Provided that the enduring power of attorney remains valid during the period Trevor is the trustee and given that the other requirements of subparagraph 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

  1. Taking the situation in Example 1, if Andrew were to travel overseas by himself and execute an enduring power of attorney in favour of his wife, Jane, Andrew would still be required to resign as trustee of the SMSF. However, as Jane is already a trustee of the SMSF, she does not need to be re-appointed in her capacity as legal personal representative for Andrew.

Example 3

  1. Clare is the member of 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 trustee, leaving Jan as the sole trustee. Other than the fact that Clare is not a trustee of the SMSF, the fund satisfies the other requirements of the definition of an SMSF in subsection 17A(1).
  2. Jan is a legal personal representative for Clare by virtue of holding an enduring power of attorney in respect of Clare. In addition, Jan is trustee of the SMSF in place of Clare. Provided that the enduring power of attorney remains valid during the period whilst Jan is the only trustee and given that the other requirements of subparagraph 17A(3)(b)(ii) are satisfied, Clare’s superannuation fund continues to satisfy the definition of an SMSF in subsection 17A(2), notwithstanding that Clare is no longer a trustee of her fund.

Example 4

  1. Chris and Marie are members of an SMSF, the trustee of which is Clear Pty Ltd. Chris and Marie are the directors of Clear Pty Ltd.
  2. Chris and Marie own their own yacht and decide to go on a cruise around the world for an indefinite period of time. Chris and Marie have three children (Rick, Cassandra and Caroline) and they have each granted an enduring power of attorney to all three of their children to be exercised jointly in accordance with State legislation. Under each joint enduring power of attorney, the children are required to act together, and never separately or severally, in relation to any activity undertaken as attorneys.
  3. Chris and Marie resign as directors of Clear Pty Ltd and Rick, Cassandra and Caroline are appointed as directors in their place. Other than the fact that Chris and Marie are not directors of Clear Pty Ltd, the fund satisfies the other requirements of the definition of an SMSF in subsection 17A(1).
  4. Rick, Cassandra and Caroline are all legal personal representatives of both Chris and Marie by virtue of each of the enduring powers of attorney executed by Chris and Marie. In addition, Rick, Cassandra and Caroline are now directors of the corporate trustee in place of Chris and Marie. Once appointed as directors, Rick, Cassandra and Caroline will act in their capacity as director and will not be bound by the requirements attaching to the enduring powers of attorney. This means that they may act separately or severally in relation to their activities as directors, and are subject to civil or criminal penalties in the event of a breach of duties. Further, provided that the enduring powers of attorney remain valid during the period whilst Rick, Cassandra and Caroline are directors, and given that the other requirements of subparagraph 17A(3)(b)(ii) are satisfied, Chris and Marie’s superannuation fund continues to satisfy the definition of an SMSF in subsection 17A(1), notwithstanding that Chris and Marie are no longer directors of the corporate trustee of the fund.

Example 5

  1. Ewan is a member of a two member SMSF with his sister. The SMSF has a corporate trustee, Transitional Pty Ltd, of which the pair are directors.
  2. Ewan has recently retired and plans to travel extensively. Consequently, he wants to put arrangements in place for the management of his affairs in his absence. Ewan executes an enduring power of attorney in favour of his father, Andrew, who he also nominates as an alternate director of Transitional Pty Ltd. Ewan does not step down as a director himself and fulfils the responsibilities of that role while he is not travelling.
  3. Andrew is a legal personal representative of Ewan by virtue of holding an enduring power of attorney. In addition, as an alternate director, Andrew is only a director of Transitional Pty Ltd while he is performing the duties of that role in place of Ewan. Provided that the enduring power of attorney remains valid during any period when Andrew is performing these duties, and given that the other requirements of subparagraph 17A(3)(b)(ii) are satisfied, Ewan’s superannuation fund continues to satisfy the definition of an SMSF in subsection 17A(1), notwithstanding that Andrew is a director of the corporate trustee of the fund.

Accordingly, in light of SMSFR 2010/2 audit procedures to be followed include:

 

When a member has donated Enduring Power of Attorney to a person, who is already a trustee of the fund (Paragraph 17 of the ruling) to act as trustee in their place must include:

  • Obtaining resignation of the member as a trustee / deed of resignation or obtaining resignation as director of corporate trustee (if applicable) and obtaining a company search to confirm ASIC has been notified of the resignation.
  • Obtaining a properly executed copy of Enduring Power of Attorney
  • Reviewing Trust Deed to ensure it provides for person to act as trustee in place of a member under enduring power of attorney
  • If corporate trustee reviewing constitution to ensure it provides for the appointment
  • Careful attention to all audit documents (e.g. minutes, trustee representation letter) to ensure they refer to the correct current trustees / directors and are signed by same
  • Being mindful as to who are the signatories to the bank accounts as indicated by Bank Audit Certificates

Additional procedures if the holder of the enduring power of attorney is not already a trustee must include:

  • Obtaining Deed of Appointment for the person holding enduring power of attorney to be appointed as trustee, consent to act, ATO Trustee Declaration or consent to act as director and company search confirming appointment as director if corporate trustee

If the fund has a corporate trustee and the holder of enduring power of attorney is appointed as an alternate director (Paragraph 10 of the ruling):

  • Review the terms of the appointment to ensure they only empower the legal personal representative to act as a director when the member is not performing those duties themselves.
When a member has lost legal capacity

It is often incorrectly assumed that a member who is under a legal disability because they have lost mental capacity must have provided another person with enduring power of attorney to be able to continue as a member of an SMSF. However, this is not the case. Of course a person under a legal disability would not at that time be able to provide another person with their enduring power of attorney.

Section 17(3)(b) of the SIS Act allows the fund to meet the definition of an SMSF when a legal personal representative of a member of the fund is a trustee of the fund or a director of the corporate trustee in place of the member when the member of the fund is under a legal disability.
Section 10 of the SIS Act defines legal personal representative as:

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.

Accordingly, the trustee of the estate of a person under a legal disability can act as a trustee or director in place of the member. For example, we have audited an SMSF where the public trustee of Queensland was the trustee of an SMSF whose sole member had lost legal capacity.

In such circumstances the auditor should obtain:

  • Medical / legal evidence of the incapacity
  • Evidence of the appointment of the trustee of the estate of the member under the legal disability
  • Resignation of the incapacitated member as a trustee / director if obtainable
  • Consent to Act as trustee / director of corporate trustee and ATO Trustee Declaration from the legal personal representative (if same is not already a trustee / director)
  • Company search for corporate trustee (if applicable) confirming legal personal representative is registered as a director with ASIC and that the member suffering mental incapacity has been resigned.

Occasionally, trustees are aware of the potential effects of illness or old age and do provide others with their enduring powers in advance of losing capacity. In these circumstances the minimum audit procedures to adopt include obtaining a copy of the Enduring Power of Attorney, checking that it was properly executed and that it was in fact an Enduring Power of Attorney. (An Enduring Power of Attorney is one that continues when the donor is unable to make their own decisions in contrast to a General Power of Attorney which ends when the donor loses their capacity to make their own decisions.[2])

We would also review the enduring power of attorney to ensure it provided for acting in respect of financial matters and whether it was conditional upon any pre-determined event occurring.

It is also necessary in these circumstances to:

  • Evidence of the appointment of the holder of the enduring power of attorney as a trustee / director of the corporate trustee of the fund
  • Resignation of the incapacitated member as a trustee/director if obtainable
  • Consent to Act as trustee / director of corporate trustee and ATO Trustee Declaration from the holder of the enduring power of attorney (if same is not already a trustee / director)
  • Company search for corporate trustee (if applicable) confirming holder of the enduring power of attorney is registered as a director with ASIC and that the member suffering mental incapacity has been resigned.

[1]http://law.ato.gov.au/atolaw/view.htm?dbwidetocone=06%3AATO%20Rulings%20and%20Determinations%20(Including%20GST%20Bulletins)%3ABy%20Type%3ARulings%3ASelf%20Managed%20Superannuation%20Funds%3A2010%3A%2304900020000%23SMSFR%202010%2F2%20-%20Self%20Managed%20Superannuation%20Funds%26c%20the%20scope%20and%20operation%20of%20subparagraph%201…%3B

[2]http://www.justice.qld.gov.au/justice-services/guardianship/power-of-attorney