What happens to a self-managed super fund when the sole director starts to lose capacity?

When the sole director and member of a self-managed super fund (SMSF) starts to lose capacity, it is important to consider who can manage the fund and how that person can be appointed.

If the sole director and member still has capacity, they may be able to appoint a trusted person as an additional or replacement director now. Doing so can reduce the risk of potential attorney conflict issues later.

If they have already lost capacity, their attorney may be able to appoint themselves or someone else as director and arrange for the incapacitated director to cease holding office. Depending on the assets held by the SMSF, winding up the fund and rolling the member’s benefits into another superannuation fund may also be an option.

The answer depends on three overlapping areas of law:

• the SMSF rules;
• the company’s internal governance; and
• the Queensland enduring power of attorney legislation.

An enduring attorney does not automatically become a director

The starting point is that an enduring power of attorney does not automatically make the attorney a director of the SMSF’s corporate trustee.

An attorney may have authority to exercise the member’s rights, including potentially their rights as the shareholder of the trustee company. However, the attorney must still be formally appointed as a director in accordance with the company’s constitution and the Corporations Act 2001.

This distinction is important.

The enduring power of attorney may give the attorney the authority to cause the appointment to occur. It is not itself the appointment.

What does the SIS Act allow?

Ordinarily, the members of an SMSF must also be the individual trustees or the directors of its corporate trustee.

There is, however, an exception where a member’s legal personal representative holds an enduring power of attorney for the member. Subject to the legislative requirements, the attorney may be appointed as a director of the corporate trustee in place of the member.

The words “in place of” matter.

It is not enough for the attorney to begin signing documents or managing the fund informally. The attorney must be properly appointed as a director, and the member must cease being a director.

Once appointed, the attorney acts personally as a director. They are not simply signing as agent for the incapacitated member. They assume the ordinary director duties and responsibilities and become the person responsible for the fund’s compliance with the superannuation rules.

If the sole director and member still has capacity

If the member still has capacity, the cleanest approach is usually to deal with the succession arrangements immediately.

The member could appoint a trusted person as:

• an additional director; or
• a replacement director.

Making the appointment while the member still has capacity avoids arguments about whether an attorney may exercise the member’s shareholder rights or appoint themselves to office.

It also reduces the risk of a potential conflict arising where an attorney uses their authority to appoint themselves as director.

For a single-member SMSF, there are particular rules about who can act as a second director. Broadly speaking, the second director must be a relative of the member or another person who is not the member’s employer, unless the employer and member are relatives.

It is not simply a matter of choosing any trusted adviser or friend. The proposed arrangement must satisfy the single-member SMSF rules.

If the sole director and member has lost capacity

If the member has already lost capacity, the position becomes more complicated but may still be capable of being resolved without Court proceedings.

The attorney may be able to exercise the member’s rights as shareholder to:

1. appoint the attorney or another appropriate person as director; and
2. remove the incapacitated member as director.

The appointment and removal need to be properly sequenced so that the company is not left without a director. A resolution removing the sole director may be ineffective if no replacement director is in office when the removal takes effect.

Before taking those steps, it is necessary to review:

• the terms of the enduring power of attorney;
• whether the financial power has commenced;
• the company constitution;
• the SMSF trust deed; and
• any provisions dealing with incapacity or cessation of office.

The incoming director must also have a director identification number, consent in writing to the appointment and be eligible to act as both a company director and an SMSF trustee.

Can the attorney appoint themselves?

Potentially, yes.

The more difficult question is whether doing so creates an unauthorised conflict transaction under the Queensland legislation.

An attorney is required to act honestly, prudently and in the principal’s interests. An attorney may generally enter into a conflict transaction only where the transaction or transactions of that type have been authorised by the principal or the Court.

The appointment of the attorney as director may be entirely sensible and in the principal’s interests. Nevertheless, the attorney is using the principal’s authority to place themselves in an office carrying separate rights, powers and responsibilities.

The safer position is for the enduring power of attorney to expressly authorise the attorney to:

• exercise the principal’s shareholder rights;
• appoint and remove directors;
• appoint themselves as a director;
• act as director of an SMSF corporate trustee; and
• act despite any overlap between their duties as attorney and their duties as director.

If the document does not contain adequate authority and the principal no longer has capacity, Court authorisation or directions may need to be considered.

Could the SMSF be wound up?

Depending on what assets are held by the SMSF, another option may be to wind up the fund and roll the member’s benefits into an industry, retail or other APRA-regulated superannuation fund.

This may be appropriate where:

• there is no suitable person willing or able to act as director;
• the member’s incapacity is permanent;
• the fund holds relatively straightforward investments;
• the ongoing cost of maintaining the SMSF is no longer justified; or
• the risks of continuing the fund outweigh its benefits.

It may be much more difficult where the SMSF holds:

• real property;
• business real property leased to a related party;
• limited recourse borrowing arrangements;
• unlisted entities;
• collectables; or
• other assets that cannot easily be sold or transferred.

Another possibility is converting the SMSF to a small APRA fund by appointing a professional trustee. That can preserve the fund structure in some cases but usually involves greater expense and reduced member control.

The practical takeaway

Where the member still has capacity, the best approach is usually to put an appropriate director and succession structure in place now.

That may include:

• appointing an additional or replacement director;
• reviewing the enduring power of attorney;
• updating the company constitution;
• updating the SMSF deed; and
• documenting exactly what is to happen if the member loses capacity.

Where capacity has already been lost, the enduring power of attorney, company constitution and SMSF deed need to be read together before any ASIC changes are lodged.

As with most SMSF succession issues, dealing with the problem early is considerably easier than trying to resolve it after the sole director can no longer act.