What will happen to my SMSF if I lose capacity?

Most SMSF trustees would be aware that every member of an SMSF must also be a trustee of the fund, or a director of the corporate trustee.

What happens if a member loses capacity and is unfit to be a trustee/director?

The good news is that they can continue to be a member of the fund if their fund is structured in a way that allows them to be removed as a director/ trustee. This is possible because the Superannuation laws enable a person appointed as an attorney under an enduring power of attorney (EPOA) to act in the place of the member.

How this occurs will be determined by the fund’s governing rules – the deed and/or the constitution of the corporate trustee. Generally documents are prepared and the attorney becomes an ‘ordinary’ trustee/director, with all the responsibilities and obligations associated with those positions. Importantly, the member must cease to be a trustee/director in conjunction with the appointment of the attorney.

A good SMSF deed and constitution will remove someone as trustee/director automatically if they lose capacity. If they don’t, the ongoing operation of the SMSF can be a challenge.

What happens if a member loses capacity and doesn’t have an EPOA?

While it does depend on each state or territories’ specific requirements, an administrator/guardian for the individual can be appointed by the state or territory. This can be a costly and time-consuming exercise and may not be what the member would have wanted.

Alternatively, the fund can become a small APRA fund, instead of an SMSF, which involves an appropriately registered entity being appointed as trustee. This option is costly and if the fund has assets such as properties or unlisted property trusts, it may be more difficult to find a willing trustee.

The member’s only other option is to be rolled out of the fund within six months of being removed as trustee/becoming incapacitated. This may require the liquidation of assets, which could result in a capital gains tax liability.

For most SMSFs, none of these outcomes are desirable.

What if my EPOA nominates more than one attorney?

Often, an EPOA will appoint attorneys to act severally or jointly. The ATOs view is that one or more of those attorneys can be appointed as an individual trustee/director in place of the member. While the EPOA may require attorneys to act together, should one or all of them be appointed to act as trustee/director, their decisions in that role must be theirs alone and be made in the context of that role. A trustee of an SMSF is required to act in the best interest of all members, not just the member they feel they represent.

What if the attorney is already a trustee/director?

The existing trustee will essentially be wearing ‘two hats’ going forward – one in relation to their own member interests and one in the attorney role for the other member.

Is the control of my fund still important if I have an EPOA?

Yes, it is still very important because the other trustees/directors will take control of the decisions of the fund.

The case of Kratz v Grossman highlights the discretion that the remaining trustee had over the payment of a death benefit. In this case, Daniel Katz bought an action against his sister, Linda Grossman. Linda’s late father appointed her as an individual trustee of his fund (SMSFs with individual trustees, must have two trustees), after his wife passed. When her father passed, Linda appointed her husband to act as her co-trustee.

The BDBN that her father had in place to pay his superannuation equally between Linda and Daniel proved to be invalid. Linda and her husband, as trustees, therefore had full discretion as to the payment of the death benefit and accordingly paid it in favour to Linda. The court held that both Linda and her husband were validly appointed as trustees and as a result they were entitled to exercise the power of the trustee and pay the superannuation to Linda.

Determining who controls the purse strings will depend on the structure of the fund.

Individual Trustees

In order to pass control of the SMSF following the incapacity of the member it is vital to consider:

  • The choice of attorney, as the intention will be for this person to become a co-trustee and assist in all future decisions, including ultimately the death benefit decision
  • The provisions in the trust deed for appointing trustees.

The most common provision for appointing trustees requires the determination of a majority of members. In a typical two member SMSF this would require the consent of the other member (generally the spouse) to have the attorney appointed. If the interests of the continuing trustee and the attorney are not aligned, which is sometimes the case in blended families, the trust deed may need to be customised to grant the attorney the right of automatic appointment on incapacity of the member.

Corporate Trustees

Generally the same issues arise where the fund has a corporate trustee, except that:

  • Control of the incapacitated member’s shares (if they have any) in the corporate trustee needs to be addressed; and
  • The power of appointed directors under the constitution needs to be considered in addition to the trustee deed provisions.

Assuming the EPOA documents adequately deal with any conflicts of an attorney appointing themselves as a director, after the passing of control of the shares, it is also necessary to consider the provisions in the constitution for appointing directors. The majority of constitutions will require a majority of members eligible to vote at a general meeting is required to appoint a director. If this would cause any misalignment between the continuing director and attorney customisation should be considered, such as automatic appointment.

Voting rights

Some governing documents and constitutions include clauses that weigh trustee, member and director voting rights in accordance with member balances. This is to provide the person with the highest member balance with control over the various decision making process (assuming a two member SMSF). This can be beneficial in an operational sense, however if incapacity arise, the member with the lower balance may not have the voting power for their attorney to appoint themselves as a trustee/director or, if appointed, the other trustee/director has the voting power to make decisions without the attorney’s input.

Choosing an attorney – particular SMSF consideration

With more and more Australians residing overseas, it is important to point out that residency tests apply to SMSFs. If a member has appointed an adult child residing overseas as an attorney, control needs to be considered. It is a requirement that the central management and control be ordinarily in Australia, which will be compromised if the majority of directors, including attorneys appointed as directors, are overseas residents. Additionally, to satisfy the Corporation Law requirements, at least one director of the company must be domiciled in Australia.


In “happy” families, control of the SMSF may seem irrelevant, but things change and plans don’t always go to plan!
Incapacity is a growing issue in general, and in particular for SMSF members. An SMSF with a member who loses capacity and does not have an EPOA, can expect the continued operation of the fund to be costly and time consuming. It is important that members understand the many issues that must be considered when appointing an attorney.

In conjunction with a complete estate and succession planning document, a regular review of your SMSF structure is vital to ensure appropriateness for the member’s particular circumstances.

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Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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