POAs and SMSFs
To operate an SMSF you must:
1. live in Australia.
2. be of sound mind.
1. Leave Australia: Your SMSF must satisfy the 3 residency tests. One of those tests is that ‘central management and control’ of the SMSF remains in Australia. However, the ATO allows SMSF members to leave the country for up to 2 years. But if a member leaves Australia for more than 2 years, the central management and control test fails. Then, the SMSF is no longer a complying SMSF.
2. Unsound mind: If you lack mental capacity (e.g. dementia) then you can no longer remain a trustee of your SMSF.
Failure of either of the above means your SMSF is non-complying. A non-complying SMSF is taxed up to 47%. A POA may pass control to the desired person. This is when the member is no longer able to act in a position of control. For example while overseas or lacking mental capacity.
Is an SMSF a ‘trust’?
A ‘trust’ has a trustee holding assets for a beneficiary. Trusts derive from ancient English law. Obviously, all superannuation funds and SMSFs are trusts. The trustee protects the assets for the beneficiaries. Sir Robert Megarry stated in Cowan v Scargill:
I can see no reason for holding that different principles apply to pension fund trusts from those which apply to other
trusts. Of course, there are many provisions in pension schemes which are not to be found in private trusts, and to
these, the general law of trusts will be subordinated. But subject to that, I think the trusts of pension funds are subject
to the same rules as other trusts.
This approach is confirmed in the Superannuation Industry (Supervision) Act 1993 (SIS Act).
ATO taxation ruling
In response to the High Court decision of Bywater Investments Limited & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation  HCA 45, the ATO published ruling TR 2017/D2. The ruling sets out the Commissioner’s considered view on how to apply the central management and control test of company residency.
While the draft ruling is not SMSF-specific, it affects the application of the ‘residency test’ and therefore whether overseas holidaymakers continue to operate a complying SMSF in Australia.
Paragraph 17 of the ruling says a person who has power or authority to control and direct a company but does not use it, does not exercise central management and control.
Paragraph 18 says:
In limited circumstances a person may control and direct a company without ongoing active intervention in the company’s affairs provided they:
- have appointed agents or managers whom they tacitly control to conduct the company’s day-to-day business
- tacitly control and regularly exercise oversight of the affairs of the company, including monitoring the company’s performance, and
- do not need to actively intervene because the company’s affairs are running
The ruling makes it necessary for overseas holidaymakers to have their SMSF documents reviewed and updated, or run the risk of having their SMSF taxed at 47%.
All Members must be Trustees or Directors of the Trustee – but not always
Section 17A SISA states that all SMSF fund members are trustees or directors of the corporate trustee.
There are exemptions to this blanket rule. However, other persons may be trustees or directors where a member dies, is physically or mentally incapacitated or is a minor. Section 17A(3)(b)(ii) allows the member’s legal personal representative to be a trustee or director. This is in place of the member during any period when they hold an Enduring Power of Attorney.
Why do the members and the trustees have to be the same people?
What used to happen was that dad was the sole trustee of the SMSF. The other members, being mum and the children were not the trustee. If dad stuffed up the wife and children say that it wasn’t their fault. They would argue it isn’t fair to inflict penalties of them as innocent parties. The government got sick of hearing that story and changed the law so that every member had to be the trustee as well. (Or, if there was a company, then all the members are the only directors.)
Therefore, the members of an SMSF have full responsibility for the management, administration and investment of the fund. The members control the fund. This causes problems if a member lacks mental capacity. They can’t, therefore, remain as trustee/director of a corporate trustee. In this case, section 17A SIS Act provides the ability to appoint a representative for the suffering member. This is to act in place of the suffering member.
What is a Legal Personal Representative (LPR)?
When we talk about an LPR we traditionally associate this person as the executor in your Will. However, under section 10(1) SIS an LPR includes:
‘a person who holds an enduring power of attorney granted by a person’
Avoiding the penalty tax
Members can leave Australia for more than 2 years without suffering 47% tax on their SMSF. But they need to have completed the paperwork BEFORE they leave Australia.
To avoid loss of central management and control a member (the principal) signs a specialised enduring power of attorney (POA). This is in favour of a legal personal representative. The person you appoint is called the attorney. If correctly done the appointment of the attorney as a trustee (or director of the corporate trustee) allows the SMSF to remain complying.
A POA does not work if:
1. The SMSF member is “disqualified”. See section 17A(10) SIS Act.
2. Your legal personal representative is not allowed as a trustee (or a director of a corporate trustee). A ‘legal personal representative’ includes a person holding a POA.
Section 17A allows a member who no longer wishes, or cannot continue to act as trustee to escape as trustee. It allows the SMSF to remain compliant.
Medical POAs and common law POAs don’t work.
Reasons to hand over control of your SMSF
You must put in place a POA if you are going to be out of Australia for more than two years or you are losing mental capacity. You may wish to escape the obligation of being a Trustee where:
1. you are going overseas, possibly for more than two years. You must put the POA in place before you leave. There is no ‘wait and see’ rule.
2. you just don’t want to have the responsibility anymore
3. you are sick
4. you are physically or mentally incapacitated
What is a POA?
Generally, you (principal) empower another person (attorney) to represent you or act in your stead. Your attorney ‘stands in your shoes’. Your attorney, however, can’t do everything. For example, your attorney can’t vote or make a Will for you.
Each Australian jurisdiction has its own legislation governing POAs. There are 8 different types of POAs in Australia:
1. Powers of Attorney Act 2000 (Tas)
2. Powers of Attorney Act 1980 (NT)
3. Powers of Attorney Act 1998 (Qld)
4. Powers of Attorney Act 2006 (ACT)
5. Powers of Attorney Act 2003 (NSW)
6. Powers of Attorney and Agency Act 1984 (SA)
7. Property Law Act 1969 (WA) and Guardianship and Administration Act 1990 (WA) [A Property Law Act POA does not work for SMSFs]
8. Powers of Attorney Act 2014 (Vic)
Our law firm specialises in SMSFs and POAs. We review your SMSF. We draft the necessary documents enabling central management and control to remain in Australia.
The problem is that SMSF is under federal law. POAs are under state law. The overlay of jurisdictions causes problems.
Which POAs is best for you and your SMSF? Is it where you live? Is it where the SMSF assets are? Where is your trustee company registered? It is where your attorney lives? For example, an NSW POA is of little value if there is land in Victoria.
Except for WA, all jurisdictions recognise an out-of-state POA:
* Victoria: validly made EPOA made in another State or Territory is recognised in Victoria. Section 138 Powers of Attorney Act 2014 (Vic).
* NSW: POA made in another State or Territory is recognised in NSW. Section 25 Powers of Attorney Act 2003 (NSW).
* SA: Interstate POA is valid to the extent that the powers it gives under the laws of the jurisdiction in which the POA was made could validly have been given by a POA made under the South Australia Act. Section 14 Powers of Attorney and Agency Act 1984 (SA).
* QLD: A POA made in another jurisdiction which complies with the requirements of that other jurisdiction is recognised to the extent that the powers it gives could validly have been given by a Queensland POA. Section 34 Powers of Attorney Act 1998 (Qld).
* WA: Sadly, the attorney must first apply to the WA State Administrative Tribunal. This is for an order recognising the POA in WA. The Tribunal must be satisfied that the form and effect of the POA correspond sufficiently to a POA made in Western Australia. Section 104A Guardianship and Administration Act 1990 (WA).
* TAS: A POA ‘registered’ in another jurisdiction validly registered in Tasmania. Further, a POA made in another jurisdiction can be registered in Tasmania. But, only if it complies with the laws of Tasmania or the laws of another Australian jurisdiction. Sections 42 and 43 Powers of Attorney Act 2000 (TAS). However, as a sign of how out of touch the Tasmanian government is, there is no ‘registration’ is any other jurisdiction, other than Tasmania. Only Tasmania keeps a register of enduring and medical POAs.
* NT and ACT: recognise POAs and common law POAs. In the Northern Territory and ACT, the interstate POA or common law POA is treated as though it was made under the respective NT or ACT Act.
Most land title offices don’t acknowledge or even want to look at POAs made out of their home State. They say “we don’t have time to look at strange POAs from other States”. So you have to take the above recognition with a pinch of salt. Banks can barely understand a ‘local’ POA and are also unlikely to want to act on an ‘exotic’ out-of-State POA.
So, contrary to the above list, often an out-of-State POA is not recognised. Therefore, the SMSF member should prepare additional out-of-State POAs. If the SMSF member does not have the mental capacity to make out-of-State POAs then some States administrative bodies have that power. That is often expensive and time-consuming. You often get mixed results with neighbours and distant relatives sharing their views about you at the Tribunal. I remember, in one case, where the uncle exclaimed ‘he was a horrible child.’
Our Overseas SMSF kit includes:
1. Specialised Power of Attorney relevant to your State
2. Deed of Variation to the SMSF Deed
3. Deed of Indemnity and Warranty (donors carry out the duties of trustee and director in their personal capacity. Not as an agent for someone else)
4. Pre and Post Minutes
5. Letter of Advice with step by step instructions
If you lose mental capacity – then it is too late
What happens if a member loses mental capacity and has no POA. Sadly they:
1. are automatically unable to act as a trustee of the fund; and
2. can’t act as a director of an Australian company
3. can’t sign a POA (you have to be of sound mind to sign a POA)
If you forgot to prepare our POA kit before you become of unsound mind then:
1. The SMSF fund can become a small APRA fund. This is instead of an SMSF. It involves a registered trustee appointed as trustee. This is excessively expensive. The APRA trustee unceremoniously dumps your real estate, art and unlisted property trusts. They generally don’t have time to talk to you about what you want.
2. Or, you sell the assets in your SMSF. And roll over to a retail super fund. You have 6 months to sell everything and roll over the cash. The capital gains tax is usually 15% or 10%. All the money and time you spent acquiring the asset is lost. You may be selling at a bad time.
3. Or, you apply to the local State Tribunal for an order. But this is expensive and may not work.
So, you need to have put everything in place while you are of sound mind.
Secondly, the replacement of a trustee using a POA can lead to the member losing membership of the SMSF.
The ATO in SMSFR 2010/2 confirms what must happen on a member’s incapacity. The legal personal representative (attorney under your POA) is appointed as a trustee of the SMSF (or a director of the corporate trustee). Further, the member ceases as a trustee of the SMSF (or a director of the corporate trustee). This is except where the legal personal representative is appointed as an alternate director. If the legal personal representative is appointed as an alternate director, they can only hold that office while the appointing director is also a director.
The ruling confirms:
7. To comply with section 17A (3)(b)(ii) the legal personal representative is appointed as a trustee of the SMSF (or a director of the corporate trustee).
8. The appointment of the legal personal representative as a trustee and the removal of the member is according to the SMSF trust deed, the SISA and any other relevant legislation. So at Legal Consolidated we always update the SMSF deed.
9. The appointment of the legal personal representative as a director of the corporate trustee. The member is removed from this position. This is under the company constitution of the corporate trustee, the SISA and the Corporations Act 2001.
10. A member who is a director of the corporate trustee may also appoint their legal personal representative holding a POA as an alternate director in their place. This is under the corporate trustee’s constitution or section 201K of the Corporations Act. If the LPR is appointed as an alternate director, he is so appointed in his own right. He is not the member’s agent. Plus, the terms of the appointment must only empower the LPR to act as a director when the member is not performing those duties himself. The member is not removed from the position of director in these circumstances.
11. The LPR performs his duties as a trustee of the SMSF (or a director of the corporate trustee of the SMSF). This is pursuant to his appointment to that position. This is not an attorney or agent of the member. Strangely, any POA rules 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).
12. Also, 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.
What is an alternate director?
An alternate director is a person who steps in as a director to exercise the appointing director’s powers. For example, a director who is unable to attend a directors’ meeting or to their duties while they are overseas can appoint a person to act for them as their alternate director for the relevant period.
Under the Corporations Act 2001 (Cth) a director may appoint an alternate director to exercise some or all of the appointing director’s powers for a specified period. The exercise of a power by an alternate director is just as effective as if it was exercised by the appointing director. Section 201K of the Act is a replaceable rule for the appointment of an alternate director. However, each company constitution must be checked to see whether an alternate director role exists and what rules govern that role. Alternatively, you can update a company constitution here: https://www.legalconsolidated.com.au/replace-a-company-constitution/
The alternate director’s appointment stops if the appointing director resigns as a director. This is relevant where the appointing director loses mental capacity. If the director loses mental capacity they automatically are no longer a director. As they are no longer a director the alternate director stops holding the job. An alternate director is useless for succession.
Sadly, many POAs don’t work
A POA is based in one particular State or Territory. About 28.5% of POA made by non-lawyers don’t work. Only lawyers are legally able to prepare Deeds in Australia. However, about 12% of POAs created by lawyers don’t work. POAs are formal Deeds with many rules.
The Elder Abuse – A National Legal Response report regarding an attorney to stepping in to replace a member of an SMSF under s17(3)(b) SIS Act stated:
“7.111 Where a person has a legal disability and their enduring attorney seeks to become the trustee or director of the corporate trustee, the ALRC notes that, aside from sophisticated investors and their professional advisers, there appears to be a general lack of awareness of the complexity that surrounds the process of appointing the enduring attorney as a director/trustee of an SMSF.
7.112 The process for an enduring attorney to take control of the SMSF on the principal’s loss of capacity is not straightforward, particularly when compared to dealing with bank accounts.”
Australian Law Reform Commission, June 2017
A person can act in two capacities. Either as trustee or as an attorney. When you appoint an attorney for your SMSF how is that attorney to act?
“7.177 When an attorney becomes a director or trustee in relation to an SMSF, they do so in their personal capacity. Not in their capacity as an attorney. In that role, they are bound by the general law of fiduciary duties of trustees or the Corporations Act, and not the State and Territory powers of attorney legislation.”
At Legal Consolidated we agree. This is as far as the SMSF is concerned. However, this is not in keeping with State law. Under most States when you hold a POA you act as an attorney. You don’t act in a personal capacity. The confusion of jurisdiction adds complexity.
An Enduring POA is State law. The Corporations Act, that controls directors, is Commonwealth law. A POA attorney is not entitled to act for a director. A director’s job is ‘personal’. See: Saad v Doumeny Holdings Pty Ltd  NSWSC 893 paragraph 17 and see also Mancini v Mancini (1999) 17 ACLC 1570 at 1577-1578, per Bryson J.
But if an attorney is acting in his personal capacity isn’t that high risk for the attorney?
That is correct. Under a POA, as a trustee or director, your liability as the attorney is not controlled by the State law. It is not controlled by the attorney common law duties. Instead, you are bound by the obligations of the position to which you are personally appointed. (See SMSFR 2010/259.)
As the attorney, you replace the SMSF Trustee under the EPOA. As the new trustee, you are subject to the duties and obligations of a trustee of an SMSF. The onerous personal obligations of the old trustee now fall fully on you.
There are huge responsibility and penalties as trustee of an SMSF. See, for example, sections 52B and 52AC of the SIS Act. At the very least you should get a deed of Indemnity and Warranty.
Can my POA nominate more than one attorney?
Yes, your POA can appoint attorneys to act severally or jointly. The ATO’s view is that one or more of those attorneys can be appointed as an individual trustee (or director) in place of the member.
While the Enduring POA may require attorneys to act together, should one or all of them be appointed to act as trustee (or director), their decisions in that role are theirs alone and be made in the context of that role. A trustee of an SMSF acts in the best interest of all members, not just the member they feel they represent.
It may be easier to build a number of separate POAs. Each one appoints a different person. Such as one for your spouse. And another for your child.
What if the attorney is already a trustee (or director)?
The existing trustee wears ‘two hats’ going forward. One as a member. The other as an attorney role for the other member.
Why a Specialised Power of Attorney?
The Australian Taxation Office states in SMSFR 2010/2 on how POAs operate. This is when they are used by SMSF members going overseas. (This mostly replaces SMSFR 2009/D1.)
Section 17A(3)(b)(ii) SIS Act allows the legal personal representative (LPR) of a member to be a trustee or director in place of the member. This is during any period when they hold a Specialised Enduring Power of Attorney for that member. This section applies to SMSFs.
To be effective for an SMSF the POA must:
1. Not general or common law – it must be ‘enduring’
2. Effective in the applicable State or Territory
3. Only appointing a single person to be the donor in that POA (see 17A(3)(b))
4. Four additional express powers are written into the POA for the donee to act for the member’s 1. financial 2. business 3. property affairs and 4. member’s superannuation affairs (see SMSFR 2010/2)
Why are many POAs not valid?
You must have legal capacity to make a POA. You must also be of sound mind. Gibbons v Wright (1954) 91 CLR 423, 438 states:
“The mental capacity required by law for any instrument is relative to the particular transaction which is being effected by means of the instrument. It may be described as the capacity to understand the nature of the transaction when it is explained. One cannot consider soundness of mind in the air, but only in relation to the facts and the subject-matter of the particular case.”
Unsure if you have mental capacity? Suffered a stroke? Suffered from depression 20 years ago? Then get a doctor’s certificate to say you are of sound mind.
How to instruct us
Only through your accountant, adviser or lawyer, email us:
1. the signed SMSF Deed
2. any variations of the SMSF Deed
3. company name, ABN and current address of the trustee of your Self-Managed Superannuation fund (we can only help you if you have a corporate trustee)
4. full name and current address of each director of the above corporate trustee
5. full name and current address of each member of the SMSF
6. full name and current address of each member going overseas (or who may lose mental capacity or is tired of running their SMSF)
7. full name and current address of the person replacing the above person(s). One person can replace one or more members.
8. last financials of the SMSF showing the balance sheet (the list of assets owned by the SMSF)
Your accountant or adviser may be able to help you get this information.
We email your adviser a quote.
Your accountant, lawyer or adviser can also speak to us anytime.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
National Superannuation Partner
Legal Consolidated Barristers and Solicitors
Australia wide law firm
Head Office: 39 Stirling Highway, Nedlands, WA
Mobile: 0477 796 959
National: 1800 141 612
Email: [email protected]