Alternate director strategies posing risks for SMSFs

“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,” Mr Pakpahan said.

“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 CA is a replaceable rule in relation to the appointment of an alternate director and each constitution should therefore be checked to determine whether an alternate director role exists and what rules govern that role.”

Broadly, the powers that an alternate director can exercise are only powers that can be exercised by the appointing director at that point in time, he explained.

“The appointing director should carefully monitor their alternate director’s activities to ensure the alternate director is acting appropriately,” he said.

Mr Pakpahan also warned that an alternate director’s appointment ceases when the appointing director ceases to be a director, which would occur if the appointing director loses capacity due to loss of mental capacity.

“Moreover, generally under many constitutions, a director is automatically removed upon the loss of capacity, so an alternate director would also be removed upon loss of capacity where the constitution is drafted to remove a director on loss of capacity,” he said.

“Thus, an alternate director gives limited succession value to a director.”

He also cautioned that even though an alternate director can exercise power in Australia while the relevant appointing director or member is overseas, there may be ambiguity as to whether the overseas member is still an active director undertaking strategic and ongoing day-to-day operational decisions for the SMSF.

“For example, the appointing director may still reformulate the SMSF’s investment strategy while they are overseas,” he explained.

“The alternate director must also not act as a puppet for the appointing director; otherwise, the CMC may still be considered to reside in Australia. CMC is a factual test and not simply a matter of having the correct paperwork.”

Instead, a better strategy would be to remove the overseas director completely before they depart Australia with attorney acting as director of the SMSF corporate trustee in their place, which removes this uncertainty, he recommended.