When can another person takeover as an SMSF trustee?

MLC’s Jessica Silva outlines situations where another person can or must act as an SMSF trustee for a person who is unable to do so themselves.

While all self-managed super fund (SMSF) members must be trustees of the fund and all trustees must be members, there are some exceptions to this rule. For example:

• If a person is a minor, becomes too ill or old, has a mental incapacity or travels overseas for an extended period, they can become (or remain) a member of an SMSF if another person is appointed to act as trustee on their behalf
• If a fund member dies, their legal personal representative (LPR) will normally act on their behalf until a decision has been made to make a death benefit payable, and
• If a person becomes the last remaining fund member, they can keep the fund running if another person is appointed as trustee or implements other solutions.

When starting and running an SMSF, it’s important that all members are aware of:

• The specific situations in which they may not be able to act as trustee and the potential solutions
• Who can be appointed to act on their behalf if required, and
• What needs to be done to appoint another person as trustee.

It’s also essential they are aware that failing to meet the trustee rules and requirements could render the fund non-compliant.

What follows illustrates some specific situations and solutions:

Minor fund members

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Minors are not able to be SMSF trustees because they are classed as being under a legal disability and are not permitted to enter into contracts.

They can, however, be a member of an SMSF if a parent (who may also be a member of the fund), a guardian or a LPR is prepared to act as trustee on their behalf. 

Once the minor reaches the age of 18, the parent, guardian, or LPR must resign as trustee. At this stage, the minor will generally need to be appointed as trustee if they want to remain a member of the fund.

People with a mental incapacity

While a person who has a mental incapacity is considered to be under a legal disability and cannot be an SMSF trustee, they can be an SMSF member if a person who holds an enduring power of attorney (EPOA) is appointed to act as trustee on their behalf. 

Situations where a trustee becomes mentally incapacitated without an EPOA can be problematic.

A family member or eligible person(s) will need to be court appointed to act on that person’s behalf (ie, become that person’s LPR).

Only then are they able to become trustee of the SMSF in place of the disabled member.

Members going overseas for an extended period

If a fund member plans to go overseas permanently or, in some cases, temporarily, the Australian Tax Office (ATO) may deem that the ‘central management and control’ of the fund has not remained in Australia.

Where this is the case, the fund will not meet the definitions of ‘resident Australian superannuation fund’ and will lose access to the tax concessions. 

One way to avoid this outcome is if the member appoints an EPOA to a resident of Australia. Other possible solutions include rolling over the departing member’s benefits to a public offer fund or converting the fund to a small Australian Prudential Regulation Authority (APRA) fund (SAF).

Older members

Eventually all members of an SMSF will age and/or suffer from some sort of illness that will impact them from continuing to act as trustee or a director of a corporate trustee of their SMSF.

When this happens, they have a choice of winding up the SMSF, or choosing to continue to run the SMSF by appointing a LPR.

The legislation allows a member to appoint a LPR who holds an EPOA on their behalf to take their place as trustee of the SMSF.

Deceased members 

When a member dies, they are no longer a trustee of the SMSF and the deceased member’s LPR will act as trustee until a death benefit can be paid.

However, it is important for trustees to understand what is contained in the trust deed.

Some trust deeds may allow the remaining trustee/member to appoint someone else to act as trustee until a decision has been made to make a death benefit payable.

In Katz v Grossman, the trust deed allowed the remaining trustee to appoint another trustee to stand in the shoes of the deceased member.

This case resulted in the death benefit being paid to a single beneficiary rather than being split as per the wishes of the deceased fund member.

The members should find out whether their SMSF can accept binding death benefit nominations to assist with directing death benefits according to their wishes.

To be valid, the nomination must also be consistent with the requirements set out in the trust deed.

The person acting as trustee for the deceased member remains in this role until a decision has been made to make a death benefit payable, either in part or in full.

Once this decision has been reached, that person generally must step down as trustee.

The remaining trustees of the fund are then responsible for the ongoing management of the fund. 

Care should be taken if a part payment is made, as that person must step down as trustee when a decision has been made to pay a death benefit.

This means that the subsequent payments are determined by the remaining trustee(s).

Becoming a single member fund

Sometimes a fund that has two or more (but less than five) members will eventually become a single-member fund.

This may arise where the other member(s) depart the fund due to death, divorce or where a member becomes a disqualified person (see below). An SMSF that becomes a single-member fund can appoint a second trustee to the fund.

This person does not have to be or become a member of the fund, but they must be either a relative of the remaining SMSF member, or a person who is not an employee of the remaining SMSF member.

Alternatively, the fund could appoint a corporate trustee, where certain other conditions will need to be met.

Who can be a trustee?

Any person over the age of 18, who has not been diagnosed with a mental incapacity and is not a disqualified person, can act as a trustee for themselves.

The same group of people can act as trustee on behalf of another person if certain other conditions have been met, many of which have been outlined above.

A disqualified person, is a person who:

• Is disqualified by ATO/APRA from acting as trustee of a superannuation fund
• Is in bankruptcy, and/or
• Has been convicted of an offence or dishonest misconduct arising out of a law of the Commonwealth, State, Territory or foreign government (eg, fraud).

A disqualified person’s LPR is not permitted to act as trustee on behalf of the disqualified person.

How is a trustee appointed?

If a person is eligible to be a trustee, to become appointed to this role they will need to complete a trustee declaration form and meet a range of other conditions.

The trustee declaration form includes a statement acknowledging that the person:

• Is not a disqualified person at that time
• Is aware of their trustee obligations, and 
• Is willing and able to comply with these obligations. 

If a member leaves the fund because they roll over their benefit or die, the fund will generally have six months to rectify its structure to ensure it continues to satisfy the definition of an SMSF.

However, if a new member joins the fund, or a trustee becomes a disqualified person, the structure needs to be rectified immediately.

There is no six-month provision to resolve the trustee structure when a new member joins the fund, or when a trustee becomes a disqualified person.

Jessica Silva is a technical consultant with MLC Technical Services.