The Australian Taxation Office (“ATO”) earlier this year finalised SMSFR 2010/2 that related to the operation of Powers of Attorney (“PoA”) within Self-Managed Superannuation Funds (“SMSF”).
Subparagraph 17A(3)(b)(ii) of the SIS Act (“SISA”) applies to SMSFs. The new ruling qualifies the ATO’s views as contained in SMSFR 2009/D1.
For a PoA to be effective in the SMSF jurisdiction it first must be valid and apply to the appropriate State’s Laws. The various States and Territories have varying and different requirements with respect to PoAs.
Typically, all members of a SMSF must be individual trustees or in the case of a company acting as Trustee, all members must be directors of the corporate trustee. Nevertheless other persons may be trustees or directors in particular circumstances.
Section 17A of the SISA sets out basic conditions that a superannuation fund must satisfy in order to be an SMSF, including that all of the members must generally be trustees, or directors of the corporate trustee, of the fund. However, other persons may be trustees or directors in specific circumstances, including if a member dies, is physically or mentally incapacitated or is a minor. Subparagraph 17A(3)(b)(ii) expressly allows the legal personal representative (“LPR”) of a member to be a trustee or director in place of the member during any period when they hold an Enduring Power of Attorney (“EPoA”) in respect of that member, without causing the fund to cease being an SMSF.
Legal Personal Representative (“LPR”)
LPR is defined in subsection 10(1) of the SIS to include “a person who holds an enduring power of attorney granted by a person”. The ATO Commissioner acknowledges that the holder of an EPoA granted by a person is, indeed, the LPR of that person for the purposes of subparagraph 17A(3)(b)(ii).
Enduring powers of attorney
The Commissioner points out that only a power of attorney that is an enduring power of attorney will satisfy the requirements of subparagraph 17A(3)(b)(ii). A general power of attorney will not.
While an EPoA is intended to survive the mental incapacity of the donor, the legislation governing EPoAs in each State and Territory enables the donor to authorise the ‘donee’ to exercise those powers while the donor is mentally capable and an EPoA that is invoked while the donor is mentally capable, therefore, satisfies the requirements of subparagraph 17A(3)(b)(ii).
Note, however, that regard must still be had to the specific requirements of each jurisdiction to ensure that an EPoA is current and effective at all times during which the attorney is a trustee or director in place of a member.
Nature of the authority conferred
Note also the Commissioner considers that for the purposes of subparagraph 17A(3)(b)(ii), the authority conferred by the EPoA must include an authority to act in relation to the member’s financial, business and property affairs or the member’s superannuation affairs. Conversely, the authority cannot have an exception relating to superannuation or financial affairs. This is particularly noteworthy, because the Commissioner’s requirements appear to go further than the legislation and may mean that some existing EPoAs are inadequate for the purposes of subparagraph 17A(3)(b)(ii), i.e. that they will need to be redrafted before a trustee or director appointment can be made (or continue) pursuant to them.
Validity of enduring power of attorney
The exception in subparagraph 17A(3)(b)(ii) applies during any period when the LPR has an EPOA in respect of the member. It is, according to the Commissioner, implicit in this requirement that the EPOA remains current and satisfies the relevant State and Territory power of attorney legislation at all times during which the attorney is a trustee, or director of a corporate trustee, in place of the member.
Therefore, if the EPOA terminates for any reason, one of the conditions in subparagraph 17A(3)(b)(ii) will no longer be satisfied, the attorney will have to step down and the member will have to be re‐appointed as a trustee or director.
Power conferred on more than one person
Where a member executes an EPOA in favour of more than one person (whether joint and/or several), each of the attorneys would meet the definition of “LPR” under subsection 10(1) of the SISA. However, the Commissioner considers that in such a situation, given:
- the wording of paragraph 17A(3)(b), in particular the use of the phrase “in place of the member” and the use of the singular for “LPR” (ie, “the LPR”); and
- the purpose of section 17A as a whole to ensure equality of influence in the administration of SMSFs, only one of the attorneys can be appointed as a trustee or director in place of the member for the purposes of subparagraph 17A(3)(b)(ii).
The Commissioner considers that in order to comply with subparagraph 17A(3)(b)(ii), an attorney must actually be appointed and a member must actually be removed as a trustee or director. In other words, a person does not automatically become a trustee or director merely because they hold an EPOA.
The appointment of an attorney and the resignation of a member as a trustee must be in accordance with the fund’s trust deed, the SISA and relevant State or Territory trustee legislation. In particular, according to the Commissioner, the trust deed must allow the appointment of a person who is not a member of the fund as a trustee in place of the member.
Similarly, the appointment of an attorney and the resignation of a member as a director must be in accordance with the constitution of the corporate trustee, the SISA and the Corporations Act 2001 (Cth) (Corporations Act). If the attorney is appointed as an alternate director, the Commissioner considers that they must be so appointed in place of the member and not as the member’s agent. Otherwise, the member may still retain office, in which case the requirements of subparagraph 17A(3)(b)(ii) would not be met.
Once appointed, an attorney performs their duties as a trustee or director pursuant to their appointment to the position rather than as an attorney for the member. Consequently, any proscription 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 do not affect the operation of subparagraph 17A(3)(b)(ii).
Obligations imposed on trustees and directors
People contemplating becoming a trustee, or a director of the corporate trustee, of an SMSF (whether pursuant to an EPOA or otherwise) would do well to note that once appointed in place of the member, they assume the duties, responsibilities and obligations of a trustee or director in their personal capacity and not as an agent for someone else. Further, they may be subject to civil and criminal penalties for any breaches of their duties under the SISA or other legislation and as a director of a corporate trustee, they may also be subject to civil and criminal penalties for breaches of the Corporations Act.
It is therefore critical that you should always obtain legal advice first before deciding to become or provide a Power of Attorney.
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This article was written by
Ian Glenister, B.Juris LL.B SSA | Glenister & Co