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Self Managed Super Fund (SMSF) Article
How to avoid a super slug while you're away
By Tony Negline.
This article may be out of date.
22nd July 2009
Once major tenant of the laws governing Self Managed Super Funds is that each member of a fund must also be a trustee and there can be no other trustees.
If the fund trustee is a company then each member must be a director of that company and there can be no other directors of that corporation.
Special rules exist for Self Managed Funds with only one member.
There is also some flexibility for minors, people who are undischarged bankrupts, anyone who committed a crime of dishonesty at any stage in the past or anyone who the super regulators have banned from being a super fund trustee.
These super laws also allow a legal personal representative with an enduring power of attorney to act as trustee for a member. This final rule has left many people wondering when and how it could be used.
Two examples spring to mind.
Firstly, suppose a self-managed fund trustee has reached an advanced age and no longer feels capable of making financial decisions. Without stating the obvious, the age when parents will want to begin relying on their children for assistance in their financial affairs varies greatly. Typically the process begins with Mum and Dad seeking a second opinion and then progressively passing over all responsibility.
The second example involves satisfying the Australian Super Fund test. If a super fund fails one part of this three limb definition then very large tax penalties will apply of up to 71%. Self-managed fund trustees who are overseas for extended periods of time are in particular danger of failing this ASF test.
One part of this test looks at central control and management resides. That is, who performs the strategic high level decision-making and processes and activities of the fund and when and where they do these functions.
SMSF trustees based overseas who have no definite plans about returning to Australia are in particular danger of failing this test.
Given the size of the tax penalties great care should be exercised in managing this ASF test. Ideally the issues should be dealt with prior to leaving Australia.
In both these examples it may be possible for an enduring power of attorney (EPoA) to be appointed as a self-managed fund trustee. An EPoA is a power authorised by statute which survives the mental incapacity of the donor. Note that the appointment of a power of attorney is insufficient.
So what are some of the issues about appointing an EPoA?
Each State and Territory has specific legislation that deals with this issue and all these rules in allow the attorney to exercise their powers when the donor is mentally capable. The ATO have said that in their view a power of attorney invoked when the donor is mentally capable will satisfy the relevant super laws.
An EPoA might be granted over all of a donor's property, business or financial affairs or specific areas. The ATO say that an EPoA seeking to confer self-managed super fund trusteeship must be broad enough to encompass this role and must not exclude superannuation or financial affairs.
Once the EPoA has been granted, the attorney must then be specifically appointed a trustee of the self-managed super fund and the member must be removed as a trustee.
Before this appointment takes place the super fund's trust deed and relevant State or Territory legislation should be carefully examined. If a super fund has a corporate trustee then the constitution and the Corporations Act need to be carefully reviewed.
The trust deed must allow a non-member to be a trustee and once appointed the attorney derives authority to run the super fund by being a trustee not as an agent of the member under the EPoA.
In a Tax Ruling finalized last year the ATO's said that, the Queensland legislation allows a trustee to delegate their powers by using an EPoA even if their super fund's governing rules prohibit the delegation.
In the Northern Territory, South Australia and Tasmania, the relevant legislation allows an individual trustee to delegate their duties unless the super fund's governing rules specifically prohibits it.
In New South Wales, Victoria and Western Australia individual trustees can delegate their duties unless "a contrary intention is not expressed in the fund's governing rules".
The attorney must consent in writing to be a trustee of the SMSF and the super laws must not prohibit this person from being a small fund trustee (for example because they are an undischarged bankrupt). The attorney must also sign the ATO's trustee declaration and is not allowed to receive any remuneration for any duty they perform in relation to the super fund.
For corporate trustees an alternate director may be appointed as a director and as an agent. The ATO say they do not think the appointment of an EPoA as an alternate director in the capacity as agent for the member satisfies the super laws.
If an EPoA is terminated for any reason then the attorney would need to step down and the member would have to be re-appointed as trustee. If this did not occur in the required time-frame the fund would cease to be a SMSF. Once a super fund ceases to be a self-managed super fund, the trustees only have 21 days to tell the ATO that the super fund isn't a Self-Managed Super Fund. Penalties can be imposed for breaching this rule.
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