The decision of McDougall J of the NSW Supreme Court in the case of The Estate of Edith Macdougall [2013] NSWSC 990 highlights the importance for a trustee of a self-managed superannuation fund (SMSF) having in place an Enduring Power of Attorney (EPoA). Failure to have an EPoA in favour of the other trustee can have adverse tax consequences, as the case indicates.

The facts were that Edith and her husband were members and trustees of their own SMSF. The fund had substantial assets. Edith died in January 2013, leaving her husband as the surviving member and trustee. Subsequently, with only one living trustee director (Mr Macdougall), the SMSF ceased being compliant, and therefore potentially faced a tax bill of $4 million.

The reason for this was that for fund to qualify as an SMSF, all its members (up to a maximum of 4) must be trustees, or, where the trustee is a private company, directors of the company.  Most SMSF trust deeds (or the company’s constitution) provide that a person can no longer fulfil the office of trustee (or director) upon death or loss of mental capacity. If either of these things happen, the fund ceases being a compliant SMSF, and therefore risks losing, amongst other things the right to a 15% rate of tax on its earnings.

However, there is a six month “window” following a trustee/director’s death or incapacity before a superannuation fund formally ceases to comply as an SMSF. Hence Edith’s executor urgently applied to the court for an order that the executor be appointed as replacement director of the company trustee. Brewing in the background was a larger dispute involving the apparent existence of an earlier will of the deceased, so the court was motivated to grant the order making the requested director’s appointment.

For present purposes the main issue is the proper structuring of an SMSF. A two member fund will not cease to be a complying SMSF when reduced to one member/trustee, provided the other member/trustee holds an EPoA from the latterly incapacitated trustee/director. The EPoA should be put in place at or around the time the SMSF is established.

The effect of an EPoA for an SMSF is that the active/surviving trustee/director can continue to run the fund by him or herself. The fund remains compliant as an SMSF, preserving the 15% tax rate on its earning (in lieu of the top marginal rate), plus deductibility of expenses. Had the Macdougalls put in place an EPoA the time and expense of these legal proceedings would have been avoided.

 

Allan McDougall

August 2013