SMSFs and incapacity – ATO to focus on SMSF compliance issues arising from incapacity

The ATO has indicated that it has increased its focus on SMSFs that may run into compliance and lodgement issues due to the incapacity or incapability of their trustees.

The ATO’s focus is a reminder for advisers that:

• it is important for all SMSF members to have an enduring power of attorney in place
• there is the option of having an administrator appointed in circumstances where the member does not have an enduring power of attorney and it is desirable for the SMSF to continue.

What happens if a member loses capacity?

If a member becomes incapacitated, then, practically, they can no longer be a trustee or director of a trustee company. This means that the fund can no longer satisfy the member and trustee rules in section 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).

The practical effect of this is that the member must leave the fund and must take their benefit as a lump sum, appoint an approved trustee or roll to a retail fund. This can have significant transaction costs (such as CGT and duty) and can also lead to many practical issues. For example, the trustee may need to sell assets to transfer the benefits to a retail fund.

However, if a member has appointed an attorney under an enduring power of attorney, then the attorney can become the trustee or director of the trustee company in the place of the member. This allows the trusteeship to be restructured with the attorney replacing the member and the member remaining in the fund.

What happens if a member does not have an enduring power of attorney? Can they remain a member of the SMSF?

If a member loses capacity and does not have an enduring power of attorney in place, then an application can be made to the tribunal (in Queensland, the Queensland Civil and Administrative Tribunal) to have a person appointed as an administrator on behalf of the member.

Once the administrator is appointed, the administrator (as with an attorney) can become the trustee or director of the trustee company in the place of the member. The advantage of this is that the member does not have to roll out of the SMSF and the control of the SMSF can remain with the family of the incapacitated member.

To appoint an administrator, the tribunal needs to be satisfied that:

• the member has lost capacity and is no longer able to make financial decisions (medical evidence will be required)
• there is a need for someone to be appointed to make decisions on behalf of the member (it is necessary for someone to be appointed to ensure the SMSF remains compliant)
• the person applying to be appointed is appropriate (the tribunal will not appoint a family member or other person if the appointment is likely to cause a dispute, or there may be a conflict of interest).

The administrator’s power will be determined by the order of the tribunal. Therefore, it is important that the application correctly identifies the decisions the administrator will need to make and that the wording of the tribunal’s order is appropriate. Otherwise it may be necessary to seek further orders, which could lead to unnecessary cost and delay.

Conclusion

Having an enduring power of attorney in place is extremely important for all SMSF members. However, the SMSF may not necessarily need to be wound up where a member has lost capacity without an enduring power of attorney. Appointing an administrator should be considered as an option.

If you have any questions about planning for incapacity, SMSFs or applications for the appointment of an administrator, please contact a member of our team.