3 common misunderstandings when it comes to SMSFs and enduring powers of attorney

Powers of attorney have specific uses when it comes to SMSFs – so much so that my usual mantra is that if you’ve got an SMSF you probably should also strongly consider an enduring power of attorney.

Conceptually, a power of attorney (POA) is probably reasonably well understood. It’s a document that allows one person (the Attorney) to make certain decisions for someone else (the Principal). This goes beyond just informal help or becoming a signatory on someone’s bank account and paying their bills. It gives the Attorney real power.

Normally a POA just allows the Attorney to make decisions the Principal could make themselves – so it stops being effective if the Principal loses capacity to make them. An enduring power of attorney (EPOA) is just a power of attorney that lasts even if the Principal has lost capacity (for example, they suffer from dementia).

An EPOA (but not a general POA) also has a special place when it comes to SMSFs.

An Attorney under an EPOA can replace the Principal as a trustee (or director of the corporate trustee) of their SMSF. That’s extremely valuable because normally you can’t have an SMSF unless you’re one of the trustees or directors of the corporate trustee. But having someone else (your Attorney) do it for you could be a life saver. For example, it allows people who lose capacity to keep their wealth in their SMSF rather than winding it up. It even means someone who still has capacity but is feeling less confident in managing their own SMSF could keep it running but ask someone else to take charge. It’s an extremely valuable document.

So what are the three most common mistakes?

Just “having” an EPOA is not enough

While an Attorney can replace the Principal as trustee or director of their SMSF, it’s not automatic. There’s still a formal appointment process to go through. Super law just allows this to happen without causing the fund to break the rules about trustees for SMSFs. This is often misunderstood – we frequently see situations where the Attorney simply starts signing documents on behalf of the trustee much like they would when it comes to other matters such as dealing with their bank or utility providers. But in fact the Attorney can only “do things” as trustee of the SMSF when they’ve been officially appointed to be a trustee – and the rules for how that happens will be part of the fund’s trust deed or the corporate trustee’s constitution.

The Principal doesn’t necessarily need to lose capacity

Normally family members only start making sure they have a power of attorney when there is a real risk the Principal is losing capacity.

But in fact it’s entirely possible for an Attorney to take the Principal’s place as trustee of their SMSF even when they’re perfectly capable of doing the job themselves. SMSF trustees who move overseas for an extended period often do exactly that. They do it because another rule for all super funds is that they must generally be controlled by people in Australia. Hence a local Attorney allows the fund to meet that rule even when the members have moved overseas.

One common mistake here, though, is not checking the EPOA document itself. What if it only comes into force if the Principal has actually lost capacity? In that case, the swap won’t work.

Member and trustee roles are different

One of the challenging things about SMSFs is that the same person fills dual roles – they are generally both the member (ie it’s their super) and the trustee (ie they’re in charge of how the fund is run).

Any Attorney (even someone appointed under a general POA) might be able to make decisions for their Principal as a member. For example, they could make contributions for their Principal (using the Principal’s money of course), request benefits, request the trustee to start a pension etc.

And when they do it, they’re simply stepping into the member’s shoes – there is no formal appointment process. If they signed a letter requesting a pension, for example, they’d even sign it “on behalf of…” or “as the attorney for….”.

But making decisions about running the fund (where the money will be invested, whether a particular benefit will be paid at the member’s request etc) is a trustee duty. When the Attorney makes those decisions, they’re not acting “on behalf of” their Principal. Instead, they will have been formally appointed as a trustee and will be making decisions themselves, taking full responsibility for them. If the fund breaks the rules, the Attorney will be held responsible.

While they may be misunderstood sometimes, EPOAs can be a godsend for SMSFs. Even in cases where the member has lost capacity and the family intends to wind up the SMSF, having an Attorney who can take over can provide more time to do this work. Often the flexibility to spread a wind up over several years can create much better tax outcomes than being forced into quick action because a member’s capacity is declining.

It's definitely worth starting from the premise that every SMSF member should also have an enduring power of attorney.

We have some great guides for both the Principal and Attorney where an SMSF is involved – they’re available as part of our Super Companion.