By Graeme Colley
Executive Manager, SMSF Technical & Private Wealth
There may be times when you need to consider a change of SMSF trustee or director of the company trustee. Why do it? But sometimes there may be no choice.
The reasons for changing an SMSF trustee can be because the trustee/member has lost mental capacity, confidence in running a fund, going overseas or because of the death of the trustee/member. Sometimes replacement may come down to the provisions of the fund’s trust deed and at other times due to the need for the SMSF to satisfy the definition under the Superannuation Industry (Supervision) Act (SIS Act).
The basic rule under the SIS Act requires all members to be individual trustees or directors of the company trustee. For a fund that has just one member, there are special rules to have a second trustee for the SMSF to satisfy the trust law requirements. This rule extends to allow single director trustee companies to have two directors, if desired.
Where it is not possible for a person to be a trustee the SIS Act allows an alternative trustee to take the place of a member/trustee or for a company trustee. This can occur if the member has granted an enduring power of attorney to the person, the member is under 18 or on the member’s death.
Loss of Capacity
A person who loses mental capacity is usually unable to be an individual trustee of an SMSF or director of a corporate trustee. It is possible for them to be replaced by their legal personal representative or anyone who they have granted an enduring power of attorney. Appointment of their replacement is usually provided by the provisions of the fund’s trust deed.
If the replacement trustee ceases to be the person’s legal personal representative, they would be required to cease as trustee or director of the corporate trustee.
Bernie has not been remembering things as well as in the past and a recent medical examination has shown he is suffering from dementia. Luckily, Bernie has granted an enduring power of attorney to his daughter Iris who will replace him as trustee. The provisions of the fund’s trust deed provide that if a trustee loses their mental capacity they are terminated. This will allow Iris to be appointed as trustee because she holds an enduring power of attorney granted by Bernie.
Loss of Confidence
Sometimes, due to age or other reason, a member may not wish to be trustee although they understand the advantages of having an SMSF. Rather than wind up the fund they will have someone act as trustee in their place. This can be done by having their legal personal representative or someone who has been granted an enduring power of attorney act in their place as trustee or director.
Death of Trustee
On the death of a trustee/member it is usual that their legal personal representative, who may also be the executor of their estate, be appointed in their place but it is not compulsory. In some trust deeds the appointment of the deceased member’s legal personal representative as trustee may be compulsory before any decisions about payment of any death benefit. The replacement trustee continues to act as trustee until the member’s benefits commence to be paid by the fund. (If you're interested in learning more about estate planning issues when a fund member passes away, check out Graeme's recent presentation at SMSFPD Digital. Read more).
Margie passed away about 3 months ago and it’s now time to consider her superannuation and payment of her death benefit from the family SMSF. Margie’s brother, Terry, is her legal personal representative and there is a provision in the fund’s trust deed that a death benefit cannot be paid until appointed to the fund. This will require Terry to become trustee of the fund or director of the trustee company before Margie’s death benefit can be distributed to her dependants as defined for purposes of the SIS Act.
If an SMSF wishes to retain tax concessions, it’s necessary to make sure the tests of being an Australian super fund are met. One test requires important decisions about the fund to be made ‘in Australia’, which means trustees must be in Australia to make the decisions. If all trustees are overseas temporarily for up to two years decisions can be made about the fund during their absence. This is proposed to change from 1 July 2022 from two year’s temporary absence to five years. However, if the trustees emigrate overseas then the rule will not be met from the time they leave Australia.
Where a trustee leaves Australia permanently or longer than 2 years on a temporary basis it is possible that the fund can continue meeting the Australian fund requirements. This can be done if the trustee grants an enduring power of attorney to someone who will be in Australia to make the required decisions. A person holding an enduring power of attorney can then be appointed as trustee by replacing the absent trustee. Once the absent trustee returns to Australia they can be reappointed once the trustee holding the enduring power of attorney has resigned.
Therese and Luke are members of the Tezza and Luke Super Fund which is an SMSF. They have decided to take up a job in the UK for 4 years but intend to return to Australia when the contract is completed. The both have Enduring Powers of Attorney granted to their son Rex to look after their financial affairs in Australia while they are overseas. Therese and Luke would need to resign as trustees before Rex is appointed to act in their place.
There may be other reasons for the replacement or appointment of a trustee. If the fund is unable to comply with the definition as being a self-managed superannuation fund because of the trustee requirement ceasing, the fund has up to 6 months to comply. A fund that has not met the trustee requirement within the six month time limit may fail to comply with the SIS Act.
A member of an SMSF who becomes bankrupt is required to leave the fund as soon as possible. This requires them to resign as trustee or director as well as a member and rollover their benefit to another fund such as a retail or industry fund. It is not possible for another person to take their place as trustee of the SMSF. If that leaves the fund as a single member fund it may be necessary to have another trustee appointed.
Marlene and her spouse Colin have an SMSF. Marlene has a business which has not been going well and he has been declared bankrupt. She will now be required to resign as trustee of the fund and rollover her benefit to another superannuation fund such as an industry or retail fund as she is unable to be a trustee of any fund while declared bankrupt.
Sometimes a member or trustee may resign from the fund for various reasons. This could be due to a family law settlement or a member rolling over benefits to another fund. It may be necessary to adjust the trustee structure if it results in just one member remaining who is also the sole individual trustee
Sam and Rochelle have decided to call their marriage to an end. The Family Court orders which direct settlement of the couple’s assets requires the super balances to be split equally. The orders require that Sam resigns as trustee after fund investments to the value of his adjusted benefit be transferred to a newly established SMSF. It will be up to Rochelle to decide whether to have a new trustee appointed or be a single director trustee company.
Some trust deeds may provide that the trustee is removed by vote of the other trustees or even other members. Usually, the deed will require that there be a majority of votes to remove the member. If this results in one member remaining it may be necessary to appoint another individual trustee, so the fund will be treated as an SMSF.
Where an SMSF has a number of issues the trustee may be removed by a regulator such as the ATO. This could occur if money has gone missing from the fund or the fund’s compliance with the legislation has been so significant that the fund should be discontinued and wound up. The regulator may decide that the SMSF trustee be replaced by a professional trustee company.
Where to now?
Just because someone may not be able to manage and operate an SMSF doesn’t mean that the fund should come to an end. There are alternatives which allows the trustee to be replaced by their legal personal representative or a person who holds an enduring power of attorney. Failing to meet the trustee requirement for an SMSF may result in an expensive catastrophe.
Upskill your knowledge
Interested in learning more about next best steps when a fund member passes away and how to get this important estate planning issue right? Check out Graeme's recent presentation at SMSFPD Digital
which examines the issues practitioners and advisers need to consider for the SMSF to continue to operate seamlessly when a member of a fund passes away. Read more