ATO’s focus on incapacity a timely reminder about EPOAs

Ms Mitchell said the ATO’s focus in this area is an important reminder for advisers on the importance of SMSF members having an enduring power of attorney in place and that there is still the option of having an administrator appointed in circumstances where the member does not have an enduring power of attorney.

She explained that where 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),” she stated.

“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.”

Where this occurs, Ms Mitchell said there can be significant transaction costs, such as CGT and duty, and it can also lead to many practical issues.

“For example, the trustee may need to sell assets to transfer the benefits to a retail fund,” she said.

“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 place of the member. This allows the trusteeship to be restructured, with the attorney replacing the member and the member remaining in the fund.”

She also reminded advisers that 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 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 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,” she said.

To appoint an administrator, Ms Mitchell said the tribunal needs to be satisfied that the member has lost capacity and is no longer able to make financial decisions, which may require medical evidence, and that there is a need for someone to be appointed to make decisions on behalf of the member. In the case of an SMSF, it is necessary for someone to be appointed to ensure the SMSF remains compliant, she said.

The tribunal also needs to be satisfied that the person applying to be appointed is appropriate, she said.

“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,” she noted.

“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.”