Enduring powers of attorney essential amid an aging population

Longer life expectancies mean many Australians will have an extended retirement, but it also puts them at risk of age related illnesses that impact a retiree’s ability to manage their super. These factors make an enduring power of attorney (EPOA) an essential document for any SMSF portfolio.

An EPOA is a legal document that allows a person (called “the principal” or “donor”) to appoint someone else (called “the attorney” or “donee”) to make decisions and act on their behalf.

EPOAs can have a critically important role to play in running an SMSF if a member loses the capacity to make decisions about their fund in the future due to illness or old age. EPOAs can also help SMSF members who want to move overseas for an indefinite period without causing their fund to fail to satisfy the definition of an Australian superannuation fund and lose its complying status while overseas. Satisfying the Australian superannuation fund definition is important for SMSFs because only a fund that is a resident super fund at all times during a financial year is considered to be a complying fund. Without an EPOA, the trustees are at risk of obstructing the continued operation of their SMSF. This can entail regulatory issues and lead to serious compliance problems.

Practically, if an SMSF member has lost mental capacity, they can no longer be a trustee or director of a trustee company of the fund. This means that the fund can no longer satisfy the definition of an SMSF as set out in section 17A of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Funds that no longer meet the SMSF definition have six months (from the time it no longer satisfies this definition) to restructure the fund to again meet the SMSF conditions in section 17A. During the six months, the SMSF is deemed not to fail the definition of an SMSF. If the trustee of the fund does not rectify the situation within this period, the fund’s complying status may be removed. If this occurs, the fund is taxed at the highest marginal tax rate (currently 45%) on its income and the market value of assets just before the start of the year in which it is made non-complying rather than only on its income at the concessional rate of 15%.

It is important to note that an attorney granted with an EPOA is only allowed to act as a trustee or director in place of an SMSF member, not in addition to the member continuing to act as a trustee or director. This means that when appointing a person holding an EPOA as a trustee/director, they (the attorneys) are the ones who are left in control of the fund, meaning they would act in their capacity as trustee/director, not as an attorney or agent for the member.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.