SMSF – Trustee duties and issues, plus Special Situations about Changing Trustees

All self-managed super fund (SMSF) members must be trustees of the fund, but a trustee need not be a member, however there are some exceptions such as:

• Minors, being too ill or old, mental incapacity or travel 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.

All members of an SMSF should be aware that failing to meet the trustee rules and requirements could render the fund non-compliant.

Specific situations about Changing Trustees and possible solutions:

Minors

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, but can 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 and the minor is then appointed as trustee if they want to remain a member.

Mental incapacity

Having a mental incapacity is also considered to be under a legal disability and means a person cannot be an SMSF trustee, but 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.

An eligible person(s) eg family member, needs to be court-appointed to act on that person’s behalf (ie, become the person’s LPR) and then are they able to become trustee of the SMSF in place of the disabled member.

Members going overseas for an extended period

Be careful if a fund member plans to go overseas permanently and in some cases, even temporarily, as the Australian Tax Office (ATO) may deem that the ‘central management and control’ of the fund has not remained in Australia and the fund will not meet the definitions of ‘resident Australian superannuation fund’ and will lose access to the tax concessions. The solution is to appoint an EPOA to a resident of Australia, or 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

In time a member of an SMSF will age and/or suffer from some sort of illness that will impact their ability for continuing to act as trustee or a director of a corporate trustee of their SMSF. Some actions are  – they have a choice of winding up the SMSF, or choosing to continue to run the SMSF by appointing 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 an LPR will act as trustee until a death benefit can be paid.

The Trust Deed rules become the guide and 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. Binding Death Nominations can assist with directing benefits as per the member’s wishes but to be valid, the nomination must also be consistent with the requirements set out in the trust deed rules.

The person appointed 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, and then usually they step down from trustee

Also note that if a part payment is made, the person must step down as trustee when a decision has been made to pay a death benefit, and the subsequent payments are determined by the remaining trustee(s).

Becoming a single member fund

If a fund that has two or more (but less than five) members it will eventually become a single-member fund and then that member can appoint a second trustee to the fund. They do not have to be or become a member of the fund as well, and cannot be an employee of the remaining SMSF member (unless a relative). Alternatively, the fund could appoint a corporate trustee, and meet certain other conditions.

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