Appoint a member representative for smooth SMSF succession

Introduction

A member representative is a person appointed under the governing rules of an SMSF to exercise the rights and entitlements of an SMSF member. A member representative can provide a number of advantages including  to ensure that a timely payment of a member’s benefit can occur before death.

What is a member representative and why appoint one?

All the powers and restrictions in respect of a member representative depend on the governing rules of the fund and the documents appointing the member representative. Accordingly, a member representative could be appointed with all the powers of a member, or a limited sub-class of powers.

Moreover, an SMSF member can appoint a representative who is given the power to make a superannuation payment without any input from the member or trustee. This can be useful if, for example, the member has lost mental capacity.  Some powers that a member representative could have are as follows:

• Making or revoking a member’s binding death benefit nomination.
• Exercising the ‘appointor power’ on behalf of a member to change a trustee of the fund.
• Making benefit payments to the member including:
  • to avoid disputes on death; and
  • to take advantage of the increased flexibility and control that is available outside the superannuation environment (eg, by ensuring the member’s superannuation benefit forms part of the member’s estate on death that is dealt with in accordance with the terms of their will).

Why not use an attorney under an enduring power of attorney (‘EPoA’) as a member representative?

We are aware that in practice some people have sought to rely on an attorney under an EPoA (eg, a spouse or close family member, trusted friend or adviser) acting on behalf of an SMSF member to exercise member rights or entitlements, including the payment of benefits. This approach is often adopted as many people think that an attorney is empowered to deal with a person’s super while they are still alive.

However, this thinking is flawed. First of all, the legislation governing EPoAs differs between each state and territory and generally does not empower an attorney to deal with a person’s interest under a trust or  an SMSF (which is a form of trust). Secondly, an EPoA will generally not be effective in respect of an SMSF without the SMSF deed expressly authorising an attorney under an EPoA to act for a member. Finally, the EPoA should have express wording that covers the donor’s superannuation and SMSF interests which is typically not present in a general financial EPoA. It should also be noted that Tasmania is the only jurisdiction that expressly recognises a person’s interest in respect of superannuation in its power of attorney legislation.

Moreover, an attorney must act in the donor’s best interests, and an attorney withdrawing a member’s benefit may not be acting in the donor’s best interests if others would otherwise stand to benefit from such a withdrawal.

For these reasons, a member representative that is expressly authorised under the SMSF’s governing rules provides a firm foundation and avoids the problems identified above in respect of EPoAs.

EPoAs still play an important role for SMSF succession planning. An attorney under an EPoA, for instance, can be appointed as an SMSF trustee or a director of a corporate SMSF trustee in place of a member when a member loses mental capacity. This ensures the trustee–member rules in the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) can still be satisfied such that the SMSF continues to meet the definition of an SMSF in s 17A of the SISA.

Tax considerations on death

The tax payable on a superannuation death benefits is an important consideration.

Where a benefit is paid on the death of a member to a death benefit dependant, the dependant will receive the benefit tax free. Under s 302-195 of Income Tax Assessment Act 1997 (Cth) a death benefit dependant is any of the following:

• a deceased person’s spouse or former spouse;
• a deceased person’s child who is under 18 years of age;
• any person with whom the deceased was in an interdependency relationship prior to the deceased’s death; or
• any other person who was a dependant of the deceased person prior to the deceased’s death.*

* NB — this limb of the definition imports the common law meaning of dependant, which is accepted to include financial dependency.

Any death benefit payment to an adult child will typically be subject to 15% tax plus applicable levies to the extent the benefit comprises a taxable component. Therefore, a death benefit payment made to an adult child (eg, where there is no surviving spouse of the deceased member) is likely to result in a significant ‘death tax’.

The importance of a timely exit strategy

One option to overcome any ‘death tax’ payable on a superannuation payment made to a non-dependant such as adult independent children is for a member to withdraw their superannuation benefit before they die (subject to a relevant condition of release being met).

A lump sum benefit withdrawal can be made where there is ample time available to implement a ‘traditional’ benefit payment, including transfer of legal title.

However, having ample time to implement a lump sum payment is not assured as a member’s health could deteriorate rapidly, and if a member loses mental capacity it may not be possible to implement a timely benefit payment without other measures in place.

A member representative can provide a solution to this issue as a member representative can be empowered to issue a directive that makes a superannuation payment without any input from the member or trustee. This provides for a timely exit strategy in the event of a member’s loss of capacity or rapid deterioration in health.

Selection of a member representative

As with the appointment of an attorney under an EPoA, selection of a member representative should be based on trust. Only a trusted person should be appointed as a member representative (eg, a family member, friend or trusted adviser) and the appointment should be regularly reviewed for its ongoing appropriateness.

Where multiple persons are appointed as member representatives, they can be appointed on a joint (ie, requiring unanimity) or joint and several basis (ie, enabling each person to act separately). A joint appointment might be appropriate where the member’s children are being appointed as member representatives, for example.

SMSF succession planning

An SMSF trustee has day to day control and therefore succession to control of the trustee, and the directors of a corporate trustee, are important factors.

In the absence of prior planning for death or loss of legal capacity, control of an SMSF may pass by default or otherwise become uncertain or unworkable such that the member’s intentions are defeated.

Accordingly, it is important that appropriate SMSF succession planning be undertaken to ensure that succession in respect of an SMSF trustee is addressed, and to the extent possible made certain, in the event of loss of capacity or death.

Conclusions

A member representative can provide numerous advantages, including the timely payment of a member’s benefit prior to death in the event of a loss of a member’s mental capacity.

Naturally, DBA Lawyers’ documents provide the ability to appoint member representatives, including in relation to implementing a pre-death payment exit strategy.