For many Australians, superannuation is a significant asset especially if a self managed superannuation fund (SMSF) is involved. However, despite this, many do not plan ahead for what happens to their superannuation upon their loss of capacity or death.
We recommend that every SMSF member should develop a succession plan to ensure there is a plan and documented process that governs the succession to control of their fund that is consistent with their other estate and succession plans. Failing to plan ahead can result in considerable uncertainty with respect to the control of the fund and the ultimate payment of their superannuation benefit. It can result in your super benefit being paid to someone other than the intended recipient and unnecessary costs and stress for family members.
Key characteristics of good succession planning
SMSF succession planning broadly aims to accomplish the following outcomes:
- the right people gain control of the SMSF to ensure that superannuation benefits are paid as intended;
- the right people receive the intended proportion of SMSF money and assets; and
- outcomes are provided in a timely and legally effective manner, with minimal uncertainty and in as tax efficient manner as possible.
SMSFs are subject to some complex rules and are strictly regulated by the ATO with sizeable penalties that can be imposed for most breaches. Thus, expert advice should be considered when undertaking SMSF succession planning, especially as not all SMSFs will have governing rules that cover the right succession strategies.
Accordingly, there is no easy ‘one size fits all solution’ for SMSF succession. However all plans should, at least:
- determine the person(s) who will occupy the office of trustee/director upon loss of capacity or death;
- ensure that the SMSF can continue to meet the definition of an SMSF under s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA);
- determine what each member’s wishes are for their superannuation benefits;
- determine to what extent each member’s wishes should be ‘locked in’ through the use of an automatically reversionary pension and/or a BDBN; and
- determine the tax profile of anticipated benefits payments.
Succession on loss of capacity — the role of attorneys
The number of people with dementia and capacity limiting degenerative diseases is on the rise, with current estimates by the Australian Institute of Health and Welfare indicating that 2 in 5 Australians over 90 have dementia.[1] In the absence of prior planning, a lack of capacity, resulting from dementia or like illness could result in major uncertainty and risk in relation to an SMSF.
Having an enduring power of attorney (EPoA) in place, prior to the loss of capacity, can help overcome this problem, as an EPoA appointment is ‘enduring’, enabling a trusted person (ie, the member’s attorney under an EPoA) to continue to run the SMSF as their legal personal representative (LPR) in the event of loss of capacity.
Naturally, given the important responsibilities placed on an attorney, only a trusted person should be nominated. EPoAs should also be subject to ongoing review to ensure their ongoing appropriateness.
Consideration should also be given as to whether the scope of the appointment should be general in nature (ie, a general financial power) or limited to the SMSF or to the SMSF trustee. For example, if the member wishes to preclude their attorney from exercising certain rights in relation to their member entitlements or making or revoking their BDBN, this should be expressly covered in their EPoA.
It should be noted that an EPoA by itself does not place an attorney into the role of an SMSF trustee or director of a corporate trustee. An EPoA merely permits the member’s attorney to occupy the office of trustee or director of the corporate trustee to help satisfy the trustee-member rules in s 17A of the SISA.
The appointment mechanism which facilitates an attorney or LPR to step into the role of trustee/director is contained must be contained in the SMSF deed and the company’s constitution. For example, in the context of a corporate trustee, in the absence of other appointment provisions in the constitution, generally a majority of the company’s shareholders must exercise their voting rights to appoint a director.
Succession on death — the role of the executor as LPR
The death of a member is the other key succession planning risk that needs to be carefully considered.
Section 17A(3) of the SISA provides an exception to the trustee–member rules where a member has died. The exception in s 17A(3) provides that a fund does not fail to satisfy the basic conditions of the trustee–member rules by reason only that:
- a member of the fund has died and the [LPR] of the member is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during the period:
- beginning when the member of the fund died; and
- ending when death benefits commence to be payable in respect of the member of the fund.
This exception permits an LPR of a deceased member (eg, an executor of a deceased person’s estate) to be a trustee/director in place of a deceased member until the member’s death benefits commence to be payable.
However, this provision does not result in an LPR becoming a trustee/director. For example, for s 17A(3) to apply, an LPR must actually be appointed as either:
- a director of the corporate trustee pursuant to the constitution of the company; or
- an individual trustee pursuant to the governing rules of the fund.
This has been confirmed in numerous cases, including in Ioppolo v Conti [2013] WASC 389, Ioppolo v Conti [2015] WASCA 45 and implicitly in Wooster v Morris [2013] VSC 594. In Ioppolo v Conti [2013] WASC 389, Master Sanderson described the operation of s 17A(3) as follows ([20]):
…The mechanism of the section is tolerably clear. Section 17A(3) allows for the appointment of an executor as a trustee of the fund but does not in its terms require such an appointment. …
These cases confirm that a deceased person’s LPR (ie, their executor) does not automatically step into the role of an SMSF trustee/director upon a member’s death. Broadly, it depends on the provisions of the SMSF deed and the company constitution (most SMSF deeds and constitutions do not have a mechanism for this to occur) and whether there are other legal documents in place to ensure this occurs.
Successor directors
By ensuring that the company constitution contains successor director provisions, it is possible to plan for succession to the role of a director in advance.
Making a successor director nomination allows a director (ie, the principal director making a nomination in accordance with an appropriately drafted constitution prepared by DBA Lawyers) to nominate a person to automatically step into their shoes immediately upon their loss of capacity, death or a specified event occurring.
The successor director strategy is designed to work in conjunction with a member’s overall estate and succession plan to enable an attorney appointed under an EPoA or an executor of a deceased member’s estate to be automatically appointed as a director without any further steps involved.
This option should be actioned well in advance of a loss of capacity or death as not all trustee company constitutions allow for successor directors. Naturally, DBA lawyers would be pleased to prepare a constitution update.
Conclusions
Forward planning supported by the right documents is required for smooth and effective SMSF succession planning.
DBA Lawyers can provide advice and tailor a solution to your particular circumstances.
Related articles:
- SMSF Succession Diagnostic Service
- Preserve the intended control of a company using successor directors
- Planning your exit: a guide to SMSF succession planning — Part 1
- Planning your exit: a guide to SMSF succession planning — Part 2
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist, visit www.dbalawyers.com.au.
By William Fettes, Senior Associate ([email protected]), Daniel Butler, Director ([email protected]) and Cassandra Hurley, Lawyer ([email protected]) DBA Lawyers
12 January 2024
[1] Australian Institute of Health and Welfare (2022) Dementia in Australia Summary report 2022, AIHW, Australian Government, <https://www.aihw.gov.au/getmedia/5a6b93b1-d819-4221-b2df-f8eac072b28b/aihw-dem-6.pdf?v=20230605171733&inline=true> accessed 9 January 2024.
